The Phillips Curve and Optimal Policy in a Structural Signal Extraction Model
We study a monetary economy subject to "signal extraction" problems, and investigate within that framework the positive and normative aspects of monetary policy. As in Lucas (1972, 1973), imperfect signal perception generates macroeconomic correlations similar to those found in the "Phillips curve" literature. Moving to normative aspects, we find that, when aggregate shocks are present, traditional nonactivist policies do not allow to reach the first best, and that an intelligent activist policy always leads to better outcomes. The specific characteristics and effectiveness of this optimal policy also depend crucially on the problem of signal extraction. (Copyright: Elsevier)
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