NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Indicator Variables for Optimal Policy

Lars E.O. Svensson, Michael Woodford

NBER Working Paper No. 7953
Issued in October 2000
NBER Program(s):   EFG   ME

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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Document Object Identifier (DOI): 10.3386/w7953

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