Optimal Advice for Monetary Policy

30 Pages Posted: 7 Nov 2007

See all articles by Susanto Basu

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

David N. Weil

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1989

Abstract

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.

Suggested Citation

Basu, Susanto and Kimball, Miles S. and Mankiw, N. Gregory and Weil, David Nathan, Optimal Advice for Monetary Policy (August 1989). NBER Working Paper No. w3054. Available at SSRN: https://ssrn.com/abstract=463482

Susanto Basu (Contact Author)

Boston College, College of Arts and Sciences, Department of Economics ( email )

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Miles S. Kimball

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N. Gregory Mankiw

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David Nathan Weil

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