How should the central bank conduct monetary policy

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Suppose, in the Friedman-Lucas money surprise model, that there are money demand shocks and shocks to total factor productivity. Neither private sector economic agents nor the central bank can observe money demand shocks directly. Private sector economic agents cannot observe productivity shocks. However, the central bank can observe productivity shocks. How should the central bank conduct monetary policy? Discuss.

Reference no: EM131402693

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