‘Time Inconsistency’: The Phillips Curve Example (An Analysis for Intermediate Macroeconomics)
AbstractThis 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.
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Bibliographic InfoPaper provided by University of the Philippines School of Economics in its series UP School of Economics Discussion Papers with number 201307.
Length: 40 pages
Date of creation: Jul 2013
Date of revision:
Publication status: Published as UPSE Discussion Paper No. 2013-07, July 2013
Philips curve; aggregate supply; time inconsistency; dynamic inconsistency; short-run optimal policy; long-run optimal policy; rational expectations; rules vs discretion;
Find related papers by 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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