NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Advice for Monetary Policy

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

NBER Working Paper No. 3054 (Also Reprint No. r1366)*
Issued in March 1990
NBER Program(s):   EFG    ME

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 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.

We solve for the rule that such an advisor should use in giving

advice.

*Published: Journal of Money, Credit, and Banking, Vol. 22, No. 1, pp. 19-36, (February 1990).

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