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Economics

Time Inconsistency and the Credibility of Central Bank Commitments

Quick fact

The Nobel Prize-winning economist Finn Kydland and Edward Prescott formalized the idea of time inconsistency in 1977, showing that policy rules can lead to better outcomes than discretion in many situations.

Why this is interesting

Imagine promising to be strict with a child, but then giving in when they cry. That's time inconsistency. Why do central banks face the same problem, and how does it make their promises less believable?