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.

*Published: Svensson, Lars E. O. and Michael Woodford. "Indicator Variables For Optimal Policy," Journal of Monetary Economics, 2003, v50(3,Apr), 691-720.

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