Credibility Dynamics and Inflation Expectations

We study the optimal design of a disinflation plan by planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to evolves as public compares realized inflation announced targets. Reputation is valuable it helps curb expectations. At same time, plans that are more tempting break lead larger expected reputational losses in ensuing equilibrium. Taking these dynamics into consideration, government announces which balances promises low with dynamic incentives make them credible. find that, despite absence inertia private economy, gradual preferred even zero-reputation limit.