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Indicator Variables for Optimal Policy under Asymmetric Information

Lars Svensson () and Michael Woodford ()

No 8255, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E37 E47 (search for similar items in EconPapers)
Date: 2001-04
New Economics Papers: this item is included in nep-mon
Note: EFG ME
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Published as Svensson, Lars E. O. and Michael Woodford. "Indicator Variables For Optimal Policy," Journal of Monetary Economics, 2003, v50(3,Apr), 691-720.
Published as Svensson, Lars E. O. and Michael Woodford. "Indicator Variables for Optimal Policy under Asymmetric Information," Journal of Economic Dynamics and Control, 28(4): 661-690, January 2004

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