Fig. 4

Heatmap: Threshold on γ₂ to ensure honored commitments in period T. The graph shows the threshold on γ₂ (y-axis) for each potential sequence of shock realizations (x-axis) in black, conditional on p_r=0.10. Yellowish (blueish) colors indicate values of γ₂, conditional on a potential shock sequence, for which a policy deviation is favorable (not favorable) in terms of welfare. If \(\gamma _{2}>\bar {\gamma }\), policy deviations do not occur in period 2