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Optimal Control and Filtering in Linear Forward-looking Economies: A Toolkit

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  • Gerali, Andrea
  • Lippi, Francesco

Abstract

We provide algorithms to solve a linear-quadratic optimal control problem with commitment. By extending to the case of imperfect information a procedure outlined in Ljungqvist and Sargent (2002), we make the results of Svensson and Woodford (2000) easy to implement. We provide a Mat-lab package that solves this class of models and analyses their properties using simulations, impulse response functions and other techniques, with both commitment and discretion. A monetary policy application, based on the “new-Keynesian” model of Clarida, Galí and Gertler (1999), is used to illustrate how the toolkit can be used.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3706.

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Date of creation: Jan 2003
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Handle: RePEc:cpr:ceprdp:3706

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Keywords: commitment; filtering; optimal control;

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References

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  1. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  3. Svensson, Lars & Woodford, Michael, 2000. "Indicator Variables for Optimal Policy," Seminar Papers 688, Stockholm University, Institute for International Economic Studies.
  4. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
  5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  6. Michael Ehrmann and Frank Smets, 2001. "Uncertain Potential Output: Implications for Monetary Policy," Computing in Economics and Finance 2001 8, Society for Computational Economics.
  7. Currie, David & Levine, Paul, 1986. "Time inconsistency and optimal policies in deterministic and stochastic worlds," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 191-199, June.
  8. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
  9. Lars E. O. Svensson & Michael Woodford, 2003. "Optimal Policy with Partial Information in a Forward-Looking Model: Certainty-Equivalence Redux," NBER Working Papers 9430, National Bureau of Economic Research, Inc.
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