Optimal Advice For Monetary Policy

The issue of how to give optimal advice regarding monetary policy when the adviser knows that the advice might be ignored is addressed. The possibility that advice might be ignored introduces at least 2 new considerations into the adviser's problem: 1. The adviser may try to increase the likelihood that the advice will be heeded. 2. The possibility that the advice will not be heeded may alter the optimal advice. The fact that policy advice may or may not be heeded changes its impact on the economy, both when the advice is taken and when it is ignored. A model is developed that is representative of a class of models in which systematic monetary policy can be used to stabilize output because of the existence of nominal stickiness. The informational advantage of the monetary authority in these models comes from its ability to set the money supply after some prices have been set in nominal terms. In such models, unanticipated money can raise only the variance of output, and the optimal advice exactly copies the alternative policy.