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Optimal Policy with Partial Information in a Forward-Looking Model: Certainty-Equivalence Redux

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  • Lars E. O. Svensson
  • Michael Woodford

Abstract

This paper proves a certainty equivalence result for optimal policy under commitment with symmetric partial information about the state of the economy in a model with forward-looking variables. This result is used in our previous paper, Indicator Variables for Optimal Policy,' which synthesizes what is known about the case of symmetric partial information, and derives useful general formulas for computation of the optimal policy response coefficients and efficient estimates of the state of the economy in the context of a fairly general forward-looking rational-expectations model. In particular, our proof takes into account that, under commitment, the policymaker can affect the future evolution of the observable variables, and thereby potentially affect the future information available.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9430.

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Date of creation: Jan 2003
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Handle: RePEc:nbr:nberwo:9430

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  1. Pearlman, Joseph, 1986. "Diverse information and rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 10(1-2), pages 333-338, June.
  2. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers, Stockholm University, Institute for International Economic Studies 666, Stockholm University, Institute for International Economic Studies.
  3. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 124, C.E.P.R. Discussion Papers.
  4. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521441964.
  5. J.H. Kalchbrenner & P.A. Tinsley, 1976. "On the use of optimal control in the design of monetary policy," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 76, Board of Governors of the Federal Reserve System (U.S.).
  6. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, Elsevier, vol. 3(2), pages 90-105, April.
  7. Pearlman, Joseph G., 1992. "Reputational and nonreputational policies under partial information," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 16(2), pages 339-357, April.
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Cited by:
  1. Michael Woodford, 2010. "Optimal Monetary Stabilization Policy," Discussion Papers, Columbia University, Department of Economics 0910-18, Columbia University, Department of Economics.
  2. Lauri Kajanoja, 2004. "Money as an indicator variable for monetary policy when money demand is forward looking," Macroeconomics, EconWPA 0405003, EconWPA.
  3. Ellison, Martin, 2006. "The learning cost of interest rate reversals," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(8), pages 1895-1907, November.
  4. Escudé, Guillermo J., 2012. "A DSGE model for a SOE with Systematic Interest and Foreign Exchange policies in which policymakers exploit the risk premium for stabilization purposes," Dynare Working Papers 15, CEPREMAP.
  5. Svensson, Lars E. O. & Woodford, Michael, 2000. "Indicator variables for optimal policy," Working Paper Series, European Central Bank 0012, European Central Bank.
  6. Frederic S. Mishkin, 2006. "Monetary Policy Strategy: How Did We Get Here?," NBER Working Papers 12515, National Bureau of Economic Research, Inc.
  7. Gerali, Andrea & Lippi, Francesco, 2003. "Optimal Control and Filtering in Linear Forward-looking Economies: A Toolkit," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3706, C.E.P.R. Discussion Papers.
  8. Svensson, Lars E. O. & Woodford, Michael, 2004. "Indicator variables for optimal policy under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(4), pages 661-690, January.
  9. Carl E. Walsh, 2008. "Announcements and the role of policy guidance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 421-442.
  10. Liam Graham & Stephen Wright, 2006. "Inspecting the noisy mechanism: the stochastic growth model with partial information," Computing in Economics and Finance 2006, Society for Computational Economics 207, Society for Computational Economics.
  11. Paul Hubert, 2010. "Monetary Policy, Imperfect Information and the Expectations Channel," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
  12. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS

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