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Monetary Policy without Commitment

Hassan Afrouzi¹; Marina Halac²; Kenneth Rogoff³; Pierre Yared⁴

¹ Columbia University, Department of Economics and NBER (email: ) · ² Yale University, Department of Economics and CEPR (email: ) · ³ Harvard University, Department of Economics, and NBER (email: ) · ⁴ Columbia University, Graduate School of Business and NBER (email: )

This paper studies the implications of central bank credibility for long-run inflation and inflation dynamics. We introduce central bank lack of commitment into a standard nonlinear New Keynesian economy with sticky-price monopolistically competitive firms. Inflation is driven by the interaction of lack of commitment and the economic environment. We show that long-run inflation increases following an unanticipated permanent increase in the labor wedge or decrease in the elasticity of substitution across varieties. In the transition, inflation overshoots and then gradually declines. Quantitatively, inflation overshooting is persistent, and the welfare loss from lack of commitment relative to inflation targeting is large. (JEL D43, E12, E23, E24, E31, E52, E58)

DOI

10.1257/aer.20241925

Volume

116 (7)

Pages

2422-2453

Language

en

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BibTeX

Sources

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