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‘Time Inconsistency’: The Phillips Curve Example (An Analysis for Intermediate Macroeconomics)

Author

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  • Fidelina B. Natividad-Carlos

    (School of Economics, University of the Philippines Diliman)

Abstract

This paper provides the algebra and a panel diagram to attempt to examine the so-called inflation- unemployment (or Phillips curve, or aggregate supply) example, the most popular example in the literature when introducing the concept of “time inconsistency” or “dynamic inconsistency”. The resulting panel diagram (along with the derivations presented in the appendices) is used to analyze the different possible outcomes, depending on the scenarios – rule or pre-commitment, cheating, and equilibrium – and find out whether there is indeed “time inconsistency” or “dynamic inconsistency” in the said example.

Suggested Citation

  • Fidelina B. Natividad-Carlos, 2013. "‘Time Inconsistency’: The Phillips Curve Example (An Analysis for Intermediate Macroeconomics)," UP School of Economics Discussion Papers 201307, University of the Philippines School of Economics.
    • Handle: RePEc:phs:dpaper:201307
    as

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    File URL: http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/711/183
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    References listed on IDEAS

    as
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    7. R. A. Pollak, 1968. "Consistent Planning," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 201-208.
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    More about this item

    Keywords

    Philips curve; aggregate supply; time inconsistency; dynamic inconsistency; short-run optimal policy; long-run optimal policy; rational expectations; rules vs discretion;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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