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Indicator variables for optimal policy

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

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 50 (2003)
Issue (Month): 3 (April)
Pages: 691-720

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Handle: RePEc:eee:moneco:v:50:y:2003:i:3:p:691-720
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