IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v116y2026i7p2422-53.html

Monetary Policy without Commitment

Author

Listed:
  • Hassan Afrouzi
  • Marina Halac
  • Kenneth 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 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.

Suggested Citation

  • Hassan Afrouzi & Marina Halac & Kenneth Rogoff & Pierre Yared, 2026. "Monetary Policy without Commitment," American Economic Review, American Economic Association, vol. 116(7), pages 2422-2453, July.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:7:p:2422-53
    DOI: 10.1257/aer.20241925
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/aer.20241925
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://doi.org/10.3886/E246719V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/materials/25609
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/materials/25610
    Download Restriction: no
    File URL: https://libkey.io/10.1257/aer.20241925?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:116:y:2026:i:7:p:2422-53. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.