Lars E.O. Svensson
Princeton University,
CEPR and NBER
and
Michael Woodford
Columbia and NBER
First Draft: November 1999
This Version: April 2003
Journal of Monetary Economics 50 (2003) 691-720
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. 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.
JEL Classification: E37, E47, E52, E58
Keywords: Partial information, Kalman filter, monetary policy,
discretion and commitment