Seminar Papers, Institute for International Economic Studies, Stockholm University
Lars E. O. Svensson
Indicator Variables for Optimal Policy under Asymmetric Information
() 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. The private sector is assumed to have information about the
state of the economy that the policymaker does not possess.
Certainty-equivalence is shown to apply, in the sense that optimal policy
reactions to optimally estimated states of the economy are independent of
the degree of uncertainty. The usual separation principle does not hold,
since the estimation of the state of the economy is not independent of
optimization and is in general quite complex. We present a general
characterization of optimal filtering and control in settings of this kind,
and discuss an application of our methods to the problem of the optimal use
of "real-time" macroeconomic data in the conduct of monetary policy.
Keywords: Partial information; Kalman filter; monetary policy; discretion and commitment; certainty equivalence; separation principle; (follow links to similar papers)
JEL-Codes: E37; E47; E52; E58; (follow links to similar papers)
36 pages, February 15, 2001
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