First Draft: January 1999
This Version: June 2002
Abstract
This paper proves a certainty equivalence result for optimal policy under
commitment with symmetric partial information about the state of the economy in
a model with forward-looking variables. This result is used in our previous
paper, "Indicator Variables for Optimal Policy," which synthesizes what is known
about the case of symmetric partial information, and derives useful general
formulas for computation of the optimal policy response coefficients and
efficient estimates of the state of the economy in the context of a fairly
general forward-looking rational-expectations model. In particular, our proof
takes into account that, under commitment, the policymaker can affect the future
evolution of the observable variables, and thereby potentially affect the future
information available.
JEL Classification: E37, E47, E52, E58
Keywords: Partial information, Kalman filter, monetary policy, discretion and
commitment, certainty equivalence, separation principle.