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.

(364 K)

Published:

• Journal of Monetary Economics, Vol. 50, no. 3 (April 2003): 691-720 ,
• Lars E.O. Svensson & Michael Woodford, 2000. "Indicator variables for optimal policy," Proceedings, Federal Reserve Bank of San Francisco.

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