Time Inconsistency of Benevolent Government Economies
AbstractWhy 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 InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11206.
Date of creation: 01 Jan 1986
Date of revision:
Publication status: Published in Journal of Public Economics 1986, vol. 31, pp. 25-52
Contact details of provider:
Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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time inconsistency; macroeconomic policy; benevolent government;
Other versions of this item:
- Tesfatsion, Leigh, 1986. "Time inconsistency of benevolent government economies," Journal of Public Economics, Elsevier, vol. 31(1), pages 25-52, October.
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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- 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.
- Daniel Klein, 1990. "The microfoundations of rules vs. discretion," Constitutional Political Economy, Springer, vol. 1(3), pages 1-19, September.
- William H. Hoyt & Richard A. Jensen, 1995. "Precommitment and State and Local Policy Coordination," Public Economics 9508001, EconWPA.
- 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.
- Hammond, Peter J., 2007. "History : Sunk Cost, or Widespread Externality?," The Warwick Economics Research Paper Series (TWERPS) 808, University of Warwick, Department of Economics.
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