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Is Time-Inconsistent Behaviour Really Possible?


  • Hughes Hallett, Andrew


If private sector agents hold rational expectations, they will predict any future policy switches. Discounting the announced optimal policies, if they are not credible, will lead to a response which deprives the government of any incentive to renege on previous announcements and of the benefits of those announcements. Hence it is in the government's interest to offer a guarantee, forfeit on reneging, to overcome that discounting. That rules out time inconsistent behaviour since either the guarantee is acceptable (i.e. it is worth more than the incentive to renege) or it is not in which case the government is forced back onto the usual recursive (but time consistent) strategy. The time inconsistent solution is needed only to evaluate the required guarantee.

Suggested Citation

  • Hughes Hallett, Andrew, 1986. "Is Time-Inconsistent Behaviour Really Possible?," CEPR Discussion Papers 138, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:138

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    References listed on IDEAS

    1. William H. Branson & Willem H. Buiter, 1982. "Monetary and Fiscal Policy with Flexible Exchange Rates," NBER Working Papers 0901, National Bureau of Economic Research, Inc.
    2. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
    3. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
    4. Jeffrey Sachs & Charles Wyplosz, 1984. "Real Exchange Rate Effects of Fiscal Policy," NBER Working Papers 1255, National Bureau of Economic Research, Inc.
    5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    6. Cuddington, John T. & Vinals, Jose M., 1986. "Budget deficits and the current account : An Intertemporal Disequilibrium Approach," Journal of International Economics, Elsevier, vol. 21(1-2), pages 1-24, August.
    7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    8. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    9. Walter Galenson & Arnold Zellner, 1957. "International Comparison of Unemployment Rates," NBER Chapters,in: The Measurement and Behavior of Unemployment, pages 439-584 National Bureau of Economic Research, Inc.
    10. Jeffrey Sachs, 1980. "Wages, Flexible Exchange Rates, and Macroeconomic Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 731-747.
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    Cited by:

    1. Zhen Zhu, 1997. "Dynamic Inconsistency and Exchange-Rate Target Zones: A Welfare Analysis," International Economic Journal, Taylor & Francis Journals, vol. 11(1), pages 15-38.


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