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Working Papers

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Indeterminacy and Imperfect Information

with Thomas A. Lubik and Christian Matthes 

(Revised August 2020)
  • draft: pdf
  • older working paper draft: pdf and its supplementary appendix: pdf
  • slides: pdf
  • Video of ESWC talk: YouTube (first 30min; recorded Jul 2020)


We study equilibrium determination in an environment where two types of agents have different information sets: Fully informed agents observe histories of all exogenous and endogenous variables. Less informed agents observe only a strict subset of the full information set and need to solve a dynamic signal extraction problem to gather information about the variables they do not directly observe. Both types of agents  know the structure of the model and form expectations rationally. In this environment, we identify a new channel that generates equilibrium indeterminacy: Optimal information processing of the less informed agent introduces stable dynamics into the equation system that lead to self-fulling expectations. For parameter values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium is indeterminate. We illustrate our framework with a monetary policy problem where an imperfectly informed central bank follows an interest rate rule. 

On the Reliability of Output Gap Estimates in Real Time


Real-time estimates of the Output Gap — defined as the cyclical component of GDP — have previously been shown to be unreliable, since they are subject to large revisions when new data comes in. However, this result has so far only been derived for constant parameter models. This paper uses statistical models where the volatility of shocks to trend and cycle can vary over time. In this case, output gap estimates derived from data vintages going back to the 1970s are much closer to “final” estimates derived from all available sample data. The final estimates not only fall mostly within the credible intervals generated by the real-time data. When generated from a model with stochastic volatility, these credible sets are also tighter, at least over low-volatility periods.

Discreet Commitments and Discretion of Policymakers with Private Information


This papers presents general methods to compute optimal commitment and discretion policies, when a policymaker is better informed about the realization of some shocks than the public. In this situation, public beliefs about the hidden information emerge as additional state variables, managed by the policymaker.

Under commitment, policy is additive in two components: The optimal policy, as if the government shared the public's information set and the systematic manipulation of that information set. Even under discretion, belief management imparts history dependence.

Illustrated in a New Keynesian economy with time-varying output targets of the policymaker, belief management improves outcomes compared to symmetric information. At the margin, the policymaker tries to be intransparent about policy objectives by engineering disturbances which lower public beliefs about the persistence of output targets.

Three Essays on the Determinants of Output, Inflation and Interest Rates (2007, Study Center Gerzensee) 

Ph.D. Thesis. University of Lausanne, 18 October 2007 (Dissertation Committee)