The textbook permanent-income hypothesis predicts that the level of consumption is proportional to the level of permanent income, while, in the data, the elasticity of consumption to permanent income appears to be far below one. In this paper, I provide evidence for a novel theory for this consumption under-response to permanent income based on consumption commitments -- hard-to-adjust consumption choices that resemble long-term commitments. Empirically, I document four main new facts that support the theory: (a) the consumption elasticity to permanent income is larger for younger households, (b) it depends on past income trajectories, and (c) it becomes larger after households adjust their commitments; furthermore, I show that (d) those households that have "under-responded" to their income growth skew spending away from hard-to-adjust goods (notably shelter). These facts are evidence in favor of household "lock-in" to past consumption choices. Quantitatively, I show that consumption commitments are necessary for life-cycle models to account for all the documented facts.

We study the inflation target level decision under a high government debt burden. Lower targets allow for lower on-target inflation but increase the temptation to use extra inflation to generate fiscal revenue. We model this trade-off in an economy with an altruistic policymaker choosing debt and public expenditure on behalf of private agents whom finance expenditures and form inflation expectations rationally. For low debt levels, the inflation target is credible and always delivered. For high debt, the target is not credible and never delivered. In-between, the target may be delivered or not, leading to above-target expectations and expensive debt rollovers. We show that rollover costs are lower when the inflation target is higher. Our model implies that the optimal inflation target depends on debt levels.

We estimate cyclicality in labor's user cost allowing for cyclical fluctuations in the quality of worker-firm matches and wages that are smoothed within employment matches. To do so, we exploit a match's long-run wage to control for its quality. Using NLSY data for 1980 to 2019, we identify three channels by which recessions affect user cost: It lowers the new-hire wage; it lowers wages going forward in the match; but it also results in higher subsequent separations. All totaled, we find that labor's user cost is highly procyclical, increasing by more than 4% for a 1 pp decline in unemployment.