The Gains from Imperfect Inflation-Targeting Commitments

In a New-Keynesian sticky-price model, we study how the gains from commitments depend on their horizon and credibility. Continuously committing just one period ahead captures all the gains available for any strictly positive level of credibility, unless policymakers themselves exclude deviations, in which case a relatively high credibility is required just to capture the majority of these. The same applies to commitment streaks of stochastic durations; all the gains are captured with any strictly positive expected duration when policymakers believe they might deviate, while a 9-month duration only yields about half the gains available when they exclude deviations. These results, and our approach, differ from earlier contributions. ∗Christian Jensen; Department of Economics; The Moore School of Business; 1705 College Street; Columbia, SC 29208; [email protected].