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Indicator variables for optimal policy

  • Lars E.O. Svensson
  • Michael Woodford

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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Volume (Year): (2000)
Issue (Month): ()
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Handle: RePEc:fip:fedfpr:y:2000:x:3
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