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Time Inconsistency of Benevolent Government Economies

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  • Tesfatsion, Leigh S.

Abstract

Why do government policymakers in open-ended dynamic economic models with period-by-period re-optimization tend to exhibit time inconsistency, in the sense that they systematically deviate in later periods from earlier planned policy paths? This article develops necessary and sufficient conditions for time consistency for a general class of dynamic Walrasian economies that includes many previous economic models (Brock, Calvo, Kydland-Prescott, Fischer, etc.) as special cases. It is shown that the time inconsistency of government policymakers can be explained in this class of models as the consequence of successive structural changes in the constraints faced by the government policymakers as private agents carry out decisions in each successive time period conditional on anticipated future government policy settings. Annotated pointers to related work can be accessed at: http://www.econ.iastate.edu/tesfatsi/dehome.htm

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11206.

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Date of creation: 01 Jan 1986
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Publication status: Published in Journal of Public Economics 1986, vol. 31, pp. 25-52
Handle: RePEc:isu:genres:11206

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Related research

Keywords: time inconsistency; macroeconomic policy; benevolent government;

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Cited by:
  1. Hoyt, William H. & Jensen, Richard A., 1996. "Precommitment in a system of hierarchical governments," Regional Science and Urban Economics, Elsevier, vol. 26(5), pages 481-504, August.
  2. P.J. Hammond, 2007. "History: Sunk Cost, or Widespread Externality?," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 115(2), pages 161-185.
  3. William H. Hoyt & Richard A. Jensen, 1995. "Precommitment and State and Local Policy Coordination," Public Economics 9508001, EconWPA.
  4. Daniel Klein, 1990. "The microfoundations of rules vs. discretion," Constitutional Political Economy, Springer, vol. 1(3), pages 1-19, September.

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