American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Monetary Policy without Commitment
American Economic Review
(pp. 2422–53)
Abstract
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.Citation
Afrouzi, Hassan, Marina Halac, Kenneth Rogoff, and Pierre Yared. 2026. "Monetary Policy without Commitment." American Economic Review 116 (7): 2422–53. DOI: 10.1257/aer.20241925Additional Materials
JEL Classification
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E23 Macroeconomics: Production
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- E58 Central Banks and Their Policies