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Behavioural Macroeconomic Policy: New perspectives on time inconsistency

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  • Michelle Baddeley

Abstract

This paper brings together divergent approaches to time inconsistency from macroeconomic policy and behavioural economics. Behavioural discount functions from behavioural microeconomics are embedded into a game-theoretic analysis of temptation versus enforcement to construct an encompassing model, nesting combinations of time consistent and time inconsistent preferences. The analysis presented in this paper shows that, with hyperbolic/quasihyperbolic discounting, the enforceable range of inflation targets is narrowed. This suggests limits to the effectiveness of monetary targets, under certain conditions. The paper concludes with a discussion of monetary policy implications, explored specifically in the light of current macroeconomic policy debates.

Suggested Citation

  • Michelle Baddeley, 2019. "Behavioural Macroeconomic Policy: New perspectives on time inconsistency," Papers 1907.07858, arXiv.org.
    • Handle: RePEc:arx:papers:1907.07858
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    References listed on IDEAS

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