Deus ex machina wanted: time inconsistency of time consistency solutions in monetary policy
AbstractThis paper argues that delegation (optimal institutional design) is not a solution to the dynamic inconcistency problem, and can even reinforce it. We show that 'optimal' delegation is not consistent with government's incentives. We solve for delegation schemes that are consistent with these incentives and find that they imply 'no delegation'. Introducing a cost of reappointing the central banker just postpones the problem, and can only solve it if the government is infinitely averse to changing central bank's contract. Our results hint to: (i) alternative explanations for good anti-inflationary performance; (ii) strengthening central bank independence and (iii) giving a more prominent role to Central Bank reputation building in fighting inflation.
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Bibliographic InfoPaper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W10.
Length: 16 pages
Date of creation: 10 Mar 2005
Date of revision:
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Web page: http://www.nuff.ox.ac.uk/economics/
Other versions of this item:
- Florin O. Bilbie, 2005. "Deus ex machina wanted: time inconsistency of time consistency solutions in monetary policy," Economics Series Working Papers 2005-W10, University of Oxford, Department of Economics.
- NEP-ALL-2006-03-18 (All new papers)
- NEP-CBA-2006-03-18 (Central Banking)
- NEP-MAC-2006-03-18 (Macroeconomics)
- NEP-MON-2006-03-18 (Monetary Economics)
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