Hauk, E;
Lanteri, A;
Marcet, A;
(2021)
Optimal policy with general signal extraction.
Journal of Monetary Economics
, 118
pp. 54-86.
10.1016/j.jmoneco.2021.01.002.
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Abstract
Most available results on optimal decisions under partial information are derived under “separation”. But this principle does not always hold. We derive a non-standard first order condition of optimality from first principles when signal extraction and optimal policy must be jointly determined. This allows us to solve a model of optimal fiscal policy where separation does not apply. Tax smoothing prevails in normal times, but taxes respond strongly in recessions. This non-linearity arises because signal extraction interacts differently with optimal policy depending on the value of the observed signals. Existing results based on the “separation principle” follow as special cases.
| Type: | Article |
|---|---|
| Title: | Optimal policy with general signal extraction |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1016/j.jmoneco.2021.01.002 |
| Publisher version: | https://doi.org/10.1016/j.jmoneco.2021.01.002 |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Optimal policy, Partial information, Calculus of variations, Fiscal policy |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10168958 |
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