DP17120 Time-consistent implementation in macroeconomic games

• Jean Barthélemy Eric Mengus
18 Mar 2022

The commitment ability of governments is neither infinite nor zero but intermediate. In this paper, we determine the commitment ability that a government needs to implement a unique equilibrium outcome and rule out undesired self-fulfilling expectations. We first show that, in a large class of static macroeconomic games, the government can implement any time-consistent outcome with any low level of commitment ability. We then show that this result may not be robust to imperfect information, fixed costs or repeated interactions. We finally derive implications for models of bailouts, inflation bias, and capital taxation.