The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies.
- E31 - Price Level; Inflation; Deflation
- E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
- E52 - Monetary Policy
- E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
- E51 - Money Supply; Credit; Money Multipliers
- E40 - Money and Interest Rates: General
- E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
- E58 - Central Banks and Their Policies
- E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- Federal Reserve Bank of Minneapolis. Research Department
- Federal Reserve Bank of Minneapolis
- Dans Collection:
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