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Indicator Variables for Optimal Policy

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  • Lars E.O. Svensson
  • 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. 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7953.

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Date of creation: Oct 2000
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Publication status: published as Journal of Monetary Economics, Vol. 50, no. 3 (April 2003): 691-720
Handle: RePEc:nbr:nberwo:7953

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