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 pot...

Countries around the world have fallen into one of the deepest recessions since the Great Depression—a recession exacerbated by a severe financial crisis. Among the challenges that face monetary policymakers in such uncertain times is the danger economies worldwide, including the United States, Japan, and the euro area, may enter a period of deflation, in which the prices of goods and services ...

A number of dynamic models in economics are formulated with forward-looking elements in the constraints – for example, models of risk-sharing with participation constraints and models of optimal policy. Here, standard dynamic programming does not apply. Recent contributions show how to reformulate these models by either rewriting the forward-looking constraints (promised utility approach) or by...

Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking an...

Macroeconomic theorists have devoted considerable attention to designing optimal rules for government policy. The arguments for why governments should set policy in terms of rules are well known. However, until recently, there has been very little formal analysis devoted to asking how macroeconomists’ policy (regime) prescriptions can be adopted in a way which is credible. This seems quite impo...