ECN 506 Chapter 16: Chapter 16-Money and Banking
4 Aug 2016
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Most economists think monetary policy is best conducted by a central bank that is independent of the elected government. This belief stems from academic research that emphasized the problem of time inconsistency. Monetary policymakers who were less independent of the government would find it in their interest to promise low inflation to keep down inflation expectations among consumers and businesses. The time inconsistency problem occurs when policymakers (central banks) are inconsistent over time. An example of a time inconsistent policy is that a policy may appeal to the public in the short run, but produces undesirable results in the long run. This is kydland prescott theory, which can be explained by the following figures 9. 1a and 9. 1b. Consider the case for the moment that the central bank has promised an inflation rate of ideal and the public believes this promise (see figure 9. 1a). So e in the phillips curve is ideal.
