The gains from commitment when inflation persistence and data uncertainty coexist

This paper investigates how the gains from commitment are large when inflation persistence and data uncertainty coexist. We consider two types of data uncertainty: measurement errors of potential output and inflation. We show that under a situation where data uncertainty exists, there are large gains from commitment as long as inflation is not extremely forward-looking or backward-looking. In particular, an increase in measurement error of inflation reduces the gains from commitment when forward-looking inflation is important, whereas there are large gains from commitment as long as inflation is not extremely backward-looking.