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Monetary Policy without Commitment

Author

Listed:
  • Hassan Afrouzi
  • Marina Halac
  • Kenneth S. Rogoff
  • Pierre Yared

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 non-linear 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, the inflation response is large, as is the welfare loss from lack of commitment relative to inflation targeting.

Suggested Citation

  • Hassan Afrouzi & Marina Halac & Kenneth S. Rogoff & Pierre Yared, 2023. "Monetary Policy without Commitment," NBER Working Papers 31207, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31207
    Note: EFG ME POL
    as

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    Cited by:

    1. Ha,Jongrim & Kose,Ayhan & Ohnsorge,Franziska Lieselotte, 2023. "What Explains Global Inflation," Policy Research Working Paper Series 10648, The World Bank.
    2. Forbes,Kristin & Jongrim Ha & Ayhan Kose, 2024. "Rate Cycles," Policy Research Working Paper Series 10876, The World Bank.
    3. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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