This website uses cookies to ensure you have the best experience. Learn more

Time Inconsistency Essay

1566 words - 7 pages

According to the time inconsistency model article published by the 2004 Noble prize winners, Finn Kydland and Edward Prescott (1977), reveals that the use of discretionary monetary policy will lead to equilibrium with an ‘inflation bias’. In order to explain and determine how this fact was reached, we have to first explain what time inconsistency is. Time inconsistency can be referred to as when a law or rule that initially seemed most favourable at one point in time becomes unfavourable later in the future or the difference before the event and after the fact. A good example is governments none negotiating with terrorist rule. Government’s announces this rule with the primary intention to ...view middle of the document...

In trying to achieve this, there is a trade off i.e. the lower the rate of unemployment, the higher the rate of inflation. The Phillips curve shown above in appendix 1 identifies this cost and helps policy makers to reach decisions concerning this issue. This trade off however is only seen in the short run while in the long run, the only thing that changes is price (output unchanged) and the tradeoff between inflation and unemployment depends on expected inflation. This long run change in price gave rise to another problem known as the stagflation problem, i.e. a continued high rate of inflation may not possible be due to irrational policy decisions but may just be a reflection of government’s inability to commit to monetary policy.

Example, Policymakers announce in advance that their proposed policy will be to decrease inflation and the private sector after hearing this announcement acts on it and adjusts their expectation to suit this announcement. But later after the private sector has acted, the policymakers are faced with a serious dilemma. They now have an incentive to either follow through with their announcement and be credible or go back on it and cheat in order to implement an expansionary monetary policy which will reduce unemployment. In reality, most governments will cheat and raise inflation to reduce rate of unemployment below its natural rate. By the time private sector realizes that they have been cheated, they adjust their expectations back and the rate of unemployment returns back to its natural rate while there is a rise in inflation in the economy. Now, the central bank credibility has been tarnished and such announcements in the future will not be trusted. So, for them to regain the credibility back, they may want to make a commitment to a fixed policy rule or use the Ken Rogoffs model of 1985 i.e. the government should appoint a "conservative" central banker.

“Finn Kydland and Edward Prescott showed that government policymaking is subject to a time consistency problem through following Robert Lucas private sector expectation and also following Friedman and Phelps in assuming that those expectations are important determinants of economic outcomes” (Snowdon, B and R.V. Howard, 2005).

To show that using discretionary policies are unable to achieve an optimal equilibrium, we take a look at some equations.

Ux = Ux1 + V (Pt’ - Pt)…………………….. Equation 1
This equation represents the trade off issue faced by policy makers through the use of Phillips curve i.e. A rise in inflation can produce a reduction in unemployment.

U x is unemployment is time period t
Ux1 is the natural rate of unemployment
V is the positive constant
Pt’ is the expected rate of inflation in the time period t
Pt is the actual rate of inflation in the time period t

Pt’ = E(Pt I Ωt-1)........................... Equation 2
E (Pt I Ωt-1) is the rational expectation of the rate of...

Other Essays Like Time Inconsistency

Cellular Warfare: Competing for the Highest Bid & Technology

1682 words - 7 pages may have had some inconsistency in their over all profit and revenue. The company may have a dip in sales or acquired more debt during that time frame to the point of the inconsistency in their cash flow statement. Sprint Nextel Corporation statements as well remark the same as AT&T and Verizon. The total revenue for Sprint in December 2006 was $41,028 million where as in December 2002 was documented as $26,679 million. That is almost a 50

The Battling Psyche Essay

1711 words - 7 pages observed from outside perceptions so that one can examine the inner manner of that which they possess themselves, but are unable to view objectively. When the narrator first encounters his old friend he is “at once struck with and incoherence – and inconsistency; and I soon found this to arise from a series of feeble and futile struggles to overcome an habitual trepidancy, and excessive nervous agitation” (717). The inner struggles of the human

History of Apsrtc

818 words - 4 pages THE 7 New Rules of Financial Security and why you need to know them Bigda, Carolyn, Lim, Paul J. John Maynard Keynes, the Depression-era economist who's having quite the comeback, once quipped when he was accused of inconsistency: "When the facts change, I change my mind. What do you do, sir?" MONEY has long advocated the benefits of consistency in your investing and financial planning. People who swing between bold risk taking and neurotic

Mangement Roles

938 words - 4 pages credibility bias - We reject something if we have a bias against the person, organization, or group to which the person belongs: We are inclined to accept a statement by someone we like. Incremental decision making and escalating commitment - We look at a decision as a small step in a process and this tends to perpetuate a series of similar decisions. Inconsistency - The unwillingness to apply the same decision criteria in similar situations

1-800 Contacts

957 words - 4 pages other business related activities. The old system that was deployed by the company was Microsoft® SQL Server™ 2000. Although this system provided many good features like its reporting system , it had many limitation that could not match the new development in the business environment. For example: inconsistency in collecting data stemming from the different systems. Additionally, the formed reports involved adequate complexity which need the

Value of Ratio Analysis in Decision-Making

1118 words - 5 pages organization’s use of resources. Day’s receivable indicates the length of time on average collect receivables, increased trend indicates deterioration. Revenue assets indicates amount of revenues generated by each dollar invested in assets. Profitability ratios compare the ability of the organization to generate relative profitability. Return on net assets is the organization’s profit of the year. Profit margin indicates

Tanglewood Case 1

977 words - 4 pages the regions, application of policy and procedure are not unilaterally applied; each region is potently left to decide upon their own methods for operation. Gaps in policy administration promote inconsistency and can result in weakened productivity and stalled organizational growth. In today’s increasingly competitive retail market, companies are always looking for ways to improve performance and increase revenue. Tanglewood has resilient profit

Causes of Civil War

944 words - 4 pages ------------------------------------------------- REsearch Paper By: Asad Rafique July 31, 2014 Professor Russell History 121 July 31, 2014 Professor Russell History 121 Causes Of Civil War Generally, texts have showed that inconsistency between northern and southern financial prudence initiated the Civil War. The industrial revolt in the North, throughout the first few years of the 19th century, resulted into Machine age economy that depend

The Fall Of The House Of Usher

685 words - 3 pages and bizarre about the old house. As the narrator approaches the home of his long-time friend, Roderick Usher, he refers to the house as the "melancholy House of Usher". This description in the beginning of the story prepares the reader for the mysterious events that will follow. Upon looking at the building, he even feels some sense of intolerable darkness which pervades his heart. The windows appear to be "vacant” and "eye-like

Slavery and the Constitution

702 words - 3 pages planter’s wife.     The slave’s life depended on their individual owners. Some owners treated their slaves well by making sure they had decent food, clean houses, and warm clothes to wear. Other planters spent little time caring about these things. They were determining to get the most work possible from their slaves. Slaves worked from sunup to sundown, as much as sixteen hours a day. They sometimes suffered whippings and other cruel punishments

Quantitative Research

946 words - 4 pages €œParticipants completed the baseline surveys at the time of recruitment and were asked to complete follow-up surveys at each certification and classroom visit through the following 12 months” (Bartholonew et al., 2008, p. 299). WIC counselors were hired and each received a 90 minutes training for Clinical Counseling Guide for Nutrition, clinical chart for each participant which was to be flagged and counselors were trained to utilized the

Related Papers

Forecasting Palm Oil Production In Malaysia

450 words - 2 pages forecasting a variable.3.2The significant performance of the palm oil industry has shown an inconsistency of the production and instability of the palm oil prices. This has made the forecasting task of the production and prices difficult.3.3A reliable forecast is essential to the market participants to minimize uncertainties and hence losses.3.4To forecast monthly production of palm oil using the time series and econometric techniques.3.5To evaluate

The Human Computer Interface Essay

1591 words - 7 pages how you process movies, for example” (G. Anderson, D. Ferro, and R. Hilton 2013). Short term memory is where your brain does a lot of its information processing. Information in short term memory is only held for a very limited amount of time, typically up to thirty seconds. When you are designing a program, you must be aware of the limitations of a person’s short term memory, this is where psychology comes into play. Having a program that tests

Ww 1 In Poetry Essay

668 words - 3 pages The First World War brought about a radical change in the way people viewed society. It evoked the death of passion and fantasy, which were previously associated with the ideas of war. Young men no longer dreamed of riding off into battle. Mothers no longer imagined the heroic glory of their sons in war. The result of this was an outpouring of artistic expression that broke all the rules of style at the time. This form of art, known as cubism

The Age Of Consent Should Be Raid From 16 To 18

1172 words - 5 pages , after reviewing Section 10, subsection 1 of the Sexual offences act which states a person who has sexual intercourse with another person the age of sixteen years is said to have committed an offence. Our moot today, is saying  that instead of 16, one would not have the legal right to agree to sex, until one is 18. My position today will be supported by five checkpoints: •Checkpoint 1: There is inconsistency in the Jamaican laws, where