Monetary Policy without Commitment

Hassan Afrouzi, Marina Halac, Kenneth Rogoff and Pierre Yared

American Economic Review, 2026, vol. 116, issue 7, 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.

JEL-codes: D43 E12 E23 E24 E31 E52 E58 (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aer.20241925 (application/pdf)
https://doi.org/10.3886/E246719V1 (text/html)
https://www.aeaweb.org/articles/materials/25609 (application/pdf)
https://www.aeaweb.org/articles/materials/25610 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Monetary Policy without Commitment (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:116:y:2026:i:7:p:2422-53

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/aer.20241925

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().