TY - JOUR AU - Svensson, Lars E.O. AU - Woodford, Michael TI - Indicator Variables for Optimal Policy JF - National Bureau of Economic Research Working Paper Series VL - No. 7953 PY - 2000 Y2 - October 2000 DO - 10.3386/w7953 UR - http://www.nber.org/papers/w7953 L1 - http://www.nber.org/papers/w7953.pdf N1 - Author contact info: Lars E.O. Svensson Department of Economics Stockholm School of Economics P.O. Box 6501 SE-11383 Stockholm Sweden E-Mail: Leosven@gmail.com Michael Woodford Department of Economics Columbia University 420 W. 118th Street New York, NY 10027 Tel: 212/854-1094 Fax: 212-854-8059 E-Mail: mw2230@columbia.edu AB - 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. ER -