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Optimal Advice for Monetary Policy


  • Basu, Susanto, et al


This paper addresses how to give optimal advice about monetary policy when it is known that the advice may not be heeded. The authors examine a simple macroeconomic model in which monetary policy has the ability to stabilize output by offsetting exogenous shocks to aggregate demand. The optimal policy rule for such a model is easily derived, but an advisor who knows that his advice may not be followed should not recommend the optimal policy rule. This is true because, in giving activist advice, such an advisor increases uncertainty about what monetary policy will be followed. The authors solve for the rule that such an advisor should use in giving advice. Coauthors are Miles S. Kimball, N. Gregory Mankiw, and David N. Weil. Copyright 1990 by Ohio State University Press.

Suggested Citation

  • Basu, Susanto, et al, 1990. "Optimal Advice for Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 19-36, February.
  • Handle: RePEc:mcb:jmoncb:v:22:y:1990:i:1:p:19-36

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    References listed on IDEAS

    1. Alesina, Alberto & Sachs, Jeffrey, 1988. "Political Parties and the Business Cycle in the United States, 1948-1984," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 63-82, February.
    2. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 59(4), pages 555-566, October.
    3. Sachs, Jeffrey & Alesina, Alberto, 1988. "Political Parties and the Business Cycle in the United States, 1948-1984," Scholarly Articles 4553026, Harvard University Department of Economics.
    4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    5. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    7. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
    8. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-630, October.
    9. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, vol. 69(1), pages 152-160, March.
    10. Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1, January.
    11. Drazen, Allan, 1979. "The optimal rate of inflation revisited," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 231-248, April.
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