On the unimportance of commitment for monetary policy

TL;DR

This paper argues that in a New Keynesian framework with sectoral asymmetries, the benefits of commitment in monetary policy are minimal, especially when sectoral shocks drive economic fluctuations.

Contribution

It demonstrates that commitment offers negligible gains in models where sectoral shocks dominate, challenging the importance of commitment in such contexts.

Findings

Gains from commitment are zero or negligible in the model.

Sectoral shocks primarily drive economic fluctuations.

Policy focus should shift from commitment to addressing sectoral shocks.

Abstract

In a New Keynesian model where the trade-off between stabilising the aggregate inflation rate and the output gap arises from sectoral asymmetries, the gains from commitment are either zero or negligible. Thus, to the extent that economic fluctuations are caused by sectoral shocks, policies designed to overcome the stabilisation bias are aiming to correct an unimportant problem.