Indicator Variables for Optimal Policy under Asymmetric Information

Lars E. O. Svensson () and Michael Woodford
Additional contact information
Lars E. O. Svensson: Princeton University, Postal: Department of Economics, Fisher Hall, Princeton University, Princeton, NJ 08544-1021, US

No 689, Seminar Papers from Stockholm University, Institute for International Economic Studies

Abstract: 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. The private sector is assumed to have information about the state of the economy that the policymaker does not possess. Certainty-equivalence is shown to apply, in the sense that optimal policy reactions to optimally estimated states of the economy are independent of the degree of uncertainty. The usual separation principle does not hold, since the estimation of the state of the economy is not independent of optimization and is in general quite complex. We present a general characterization of optimal filtering and control in settings of this kind, and discuss an application of our methods to the problem of the optimal use of "real-time" macroeconomic data in the conduct of monetary policy.

Keywords: Partial information; Kalman filter; monetary policy; discretion and commitment; certainty equivalence; separation principle (search for similar items in EconPapers)
JEL-codes: E37 E47 E52 E58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2001-02-15
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://su.diva-portal.org/smash/get/diva2:328725/FULLTEXT01 (application/pdf)

Related works:
Journal Article: Indicator variables for optimal policy under asymmetric information (2004)
Working Paper: Indicator Variables for Optimal Policy under Asymmetric Information (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:iiessp:0689

Access Statistics for this paper

More papers in Seminar Papers from Stockholm University, Institute for International Economic Studies Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Hanna Christiansson ().