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Reputation and the credibility of inflation plans

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  • Kostadinov, Rumen
  • Roldán, Francisco

Abstract

We study the optimal design of inflation targets by a planner who lacks commitment and exerts imperfect control over inflation. By comparing realized inflation to the targets, the public forms beliefs about the government's commitment. Such reputation is valuable as it helps curb inflation expectations. However, plans that are more tempting to break lead to faster reputational losses in the ensuing equilibrium. The planner's optimal announcement balances low inflation promises with incentives to enhance credibility. We find that, despite the absence of private sources of inflation inertia, a gradual disinflation is preferred even in the zero-reputation limit.

Suggested Citation

  • Kostadinov, Rumen & Roldán, Francisco, 2025. "Reputation and the credibility of inflation plans," Journal of Economic Theory, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:jetheo:v:229:y:2025:i:c:s0022053125001085
    DOI: 10.1016/j.jet.2025.106062
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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