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Institute for International Economic Studies, Stockholm University Seminar Papers, Institute for International Economic Studies, Stockholm University

No 688:
Indicator Variables for Optimal Policy

Lars Svensson () 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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