Citation

Discussion Paper Details

Please find the details for DP138 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Is Time-Inconsistent Behaviour Really Possible?

Author(s): Andrew Hughes Hallett

Publication Date: November 1986

Keyword(s): Policy Reoptimization, Precommitment, Rational Expectations and Time Consistency

Programme Area(s): International Macroeconomics

Abstract: 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=138

Bibliographic Reference

Hughes Hallett, A. 1986. 'Is Time-Inconsistent Behaviour Really Possible?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=138