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Indicator Variables for Optimal Policy

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  • Svensson, Lars

    ()
    (Institute for International Economic Studies, Stockholm University)

  • Woodford, Michael

    (Princeton University and NBER)

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.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 688.

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Length: 53 pages
Date of creation: 01 Sep 2000
Date of revision:
Handle: RePEc:hhs:iiessp:0688

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: Partial information; Kalman filter; monetary policy; discretion and commitment;

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References

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