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Optimal Control and Filtering in Linear Forward-looking Economies: A Toolkit

  • Gerali, Andrea
  • Lippi, Francesco

We provide algorithms to solve a linear-quadratic optimal control problem with commitment. By extending to the case of imperfect information a procedure outlined in Ljungqvist and Sargent (2002), we make the results of Svensson and Woodford (2000) easy to implement. We provide a Mat-lab package that solves this class of models and analyses their properties using simulations, impulse response functions and other techniques, with both commitment and discretion. A monetary policy application, based on the “new-Keynesian” model of Clarida, Galí and Gertler (1999), is used to illustrate how the toolkit can be used.

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File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3706
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3706.

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Date of creation: Jan 2003
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Handle: RePEc:cpr:ceprdp:3706
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  1. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies.
  2. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  3. Michael Ehrmann and Frank Smets, 2001. "Uncertain Potential Output: Implications for Monetary Policy," Computing in Economics and Finance 2001 8, Society for Computational Economics.
  4. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  5. Svensson, Lars & Woodford, Michael, 2000. "Indicator Variables for Optimal Policy," Seminar Papers 688, Stockholm University, Institute for International Economic Studies.
  6. Lars E. O. Svensson & Michael Woodford, 2003. "Optimal Policy with Partial Information in a Forward-Looking Model: Certainty-Equivalence Redux," NBER Working Papers 9430, National Bureau of Economic Research, Inc.
  7. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
  8. Currie, David & Levine, Paul, 1986. "Time inconsistency and optimal policies in deterministic and stochastic worlds," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 191-199, June.
  9. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
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