文档介绍：Topics in Macroeconomic Policy: Time Inconsistency in ary and Fiscal Policies
Central Bank’s Object:
which yields
Note that this solution deviates from agents’ expectation, or equivalently, central bank’s ex-mitment. This is the time inconsistent problem found by Kydland-Prescott (1977, JPE) and Barro-Gordon (1983, JPE).
Time Inconsistency in ary Policy
Agents’ Response: Update Expectation
Find Rational Expectation (Fixed Point Problem):
The Consequent Equilibrium Inflation es
Note that this time consistent solution is inferior to the solution with zero mitment.
First-Best Allocation: government is allowed to manipulate agents’ expectation to achieve zero unemployment and inflation.
Cheating (Time-Inconsistent) Solution: government would like to deviate from her mitment, because she always has incentive to reduce unemployment by unexpected inflation.
mitment Solution: government is assumed mit to her ex-ante announced policy.
Time Consistent Solution: government is unable mit to her policy.
parison:
1 > 2 > 3 > 4
Four Solutions
Time Inconsistency in Fiscal Policy
The following model, developed by Fischer (1981, JEDC), is a benchmark to start with.
Household’s Behavior
Subject to
This yields households’ response function
A benevolent government would like to maximize households’ welfare, subject to
Four Solutions
First-Best Allocation: maximize household’s welfare subject to resource constraint.
Cheating (Time-Inconsistent) Solution: government would like to deviate from her previous policy at the second period when k has been accumulated, because she always has incentive to reduce distortion by only taxing k.
mitment Solution: Open-Loop Solution in the Stackelburgh Game.
Time Consistent Solution: Subgame Perfect Equilibrium.
parison:
1 > 2 > 3 > 4
What Causes Time Inconsistency
Insufficient Policy Instruments: One can easily find that there is no time inconsistency in the second model if the government is allowed to levy lump-sum tax (or prop