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Optimal Advice for Monetary Policy

  • Susanto Basu
  • Miles S. Kimball
  • N. Gregory Mankiw
  • David N. Weil

This paper addresses the issue of how to give optimal advice about monetary policy when it is known that the advice may not be heeded. We 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 adviser 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 adviser increases uncertainty about what monetary policy will be followed. We solve for the rule that such an adviser should use in giving advice.

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File URL: http://www.nber.org/papers/w3054.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3054.

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Date of creation: Mar 1990
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Publication status: published as Journal of Money, Credit, and Banking, Vol. 22, No. 1, pp. 19-36, (February 1990).
Handle: RePEc:nbr:nberwo:3054
Note: EFG ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
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