Seminar Papers, Institute for International Economic Studies, Stockholm University
Indicator Variables for Optimal Policy
() and Michael Woodford
Abstract: The optimal weights on indicators in models with partial
information about the state of the economy and forward-looking variables
are derived and interpreted, both for equilibria under discretion and under
commitment. An example of optimal monetary policy with a partially
observable potential output and a forward-looking indicator is examined.
The optimal response to the optimal estimate of potential output displays
certainty-equivalence, whereas the optimal response to the imperfect
observation of output depends on the noise in this observation.
Keywords: Partial information; Kalman filter; monetary policy; discretion and commitment; (follow links to similar papers)
JEL-Codes: E37; E47; E52; E58; (follow links to similar papers)
53 pages, September 1, 2000
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