Optimal commitment policy under noisy information

This paper studies an advantage of commitment over discretion when a central bankobserves only noisy measures of current inflation and output, in the context of an optimizingmodel with nominal-price stickiness. Under a commitment regime, if current policy turns outto be too expansionary (contractionary) because of the bank’s information problem,subsequent policies should be slightly contractionary (expansionary). By following thisapproach, the central bank can improve the trade-off between the fluctuations of its goalvariables caused by economic shocks and their fluctuations caused by the bank’s response tomeasurement error.[...]