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Indicator variables for optimal policy

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Author Info
Lars E.O. Svensson () (Princeton University, Department of Economics, Fisher Hall, Princeton, NJ 08544, United States.)
Michael Wooford () (Columbia University, Department of Economics, 420 W. 118th Street, New York, NY 10027, United States.)

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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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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 12.

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Length: 47 pages
Date of creation: Feb 2000
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Handle: RePEc:ecb:ecbwps:20000012

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Related research
Keywords: Partial information; Kalman filter; monetary policy; discretion and commitment.;

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References listed on IDEAS
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  1. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April. [Downloadable!] (restricted)
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  2. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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  3. Kevin J. Lansing, 2002. "Learning about a shift in trend output: implications for monetary policy and inflation," Working Papers in Applied Economic Theory 2000-16, Federal Reserve Bank of San Francisco. [Downloadable!]
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  4. LeRoy, Stephen F & Waud, Roger N, 1977. "Applications of the Kalman Filter in Short-Run Monetary Control," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 195-207, February. [Downloadable!] (restricted)
  5. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Rudebusch, Glenn D. & Svensson, Lars E. O., 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Working Paper Series 92, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  7. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  8. Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
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  9. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  10. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 277-316. [Downloadable!]
  11. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, vol. 3(2), pages 90-105, April. [Downloadable!] (restricted)
  12. Gerlach, Stefan & Svensson, Lars E O, 2002. "Money and Inflation in the Euro-Area: A Case for Monetary Indicators?," CEPR Discussion Papers 3392, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Pearlman, Joseph, 1986. "Diverse information and rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 333-338, June. [Downloadable!] (restricted)
  14. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129. [Downloadable!] (restricted)
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  16. Pearlman, Joseph G., 1992. "Reputational and nonreputational policies under partial information," Journal of Economic Dynamics and Control, Elsevier, vol. 16(2), pages 339-357, April. [Downloadable!] (restricted)
  17. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  18. Lars E.O. Svensson, 1999. "How should monetary policy be conducted in an era of price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 195-259. [Downloadable!]
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  19. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September. [Downloadable!] (restricted)
  20. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October. [Downloadable!] (restricted)
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  21. 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. [Downloadable!] (restricted)
  22. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April. [Downloadable!] (restricted)
  23. Svensson, L.E.O., 1999. "Monetary Policy Issues for the Eurosystem," Papers 667, Stockholm - International Economic Studies.
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  24. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination In Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc. [Downloadable!]
  25. 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. [Downloadable!] (restricted)
  26. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  27. Lars E. O. Svensson & Michael Woodford, 2003. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Working Papers 9747, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  28. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October. [Downloadable!] (restricted)
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  29. Svensson, Lars, 1999. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," Seminar Papers 673, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  30. Eric T. Swanson, 2000. "On signal extraction and non-certainty-equivalence in optimal monetary policy rules," Finance and Economics Discussion Series 2000-32, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  31. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December. [Downloadable!] (restricted)
  32. repec:cup:cbooks:9780521441964 is not listed on IDEAS
  33. J.H. Kalchbrenner & P.A. Tinsley, 1976. "On the use of optimal control in the design of monetary policy," Special Studies Papers 76, Board of Governors of the Federal Reserve System (U.S.).
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