The advantage of transparent instruments of monetary policy
Monetary policy instruments differ in their tightness-how closely they are linked to inflation-and their transparency-how easily the public can monitor them. Tightness is always desirable in a monetary policy instrument. When is transparency desirable? We show it is desirable when a government cannot commit to follow a given monetary policy. We apply our argument to a classic question in international economics: Is the exchange rate or the money growth rate the better instrument of monetary policy? We show that if the two instruments are equally tight and a government cannot commit to a policy, then the greater transparency of the exchange rate gives it an advantage as a monetary policy instrument.--Federal Reserve Bank of Minneapolis web site.
"Monetary policy instruments differ in their tightness-how closely they are linked to inflation-and their transparency-how easily the public can monitor them. Tightness is always desirable in a monetary policy instrument. When is transparency desirable? We show it is desirable when a government cannot commit to follow a given monetary policy. We apply our argument to a classic question in international economics: Is the exchange rate or the money growth rate the better instrument of monetary policy? We show that if the two instruments are equally tight and a government cannot commit to a policy, then the greater transparency of the exchange rate gives it an advantage as a monetary policy instrument.--Federal Reserve Bank of Minneapolis web site."@en
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