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Indicator variables for optimal policy

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  • Svensson, Lars E. O.
  • Woodford, Michael

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. JEL Classification: E37, E47, E52, E58

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Paper provided by European Central Bank in its series Working Paper Series with number 0012.

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Date of creation: Feb 2000
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Handle: RePEc:ecb:ecbwps:20000012

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