‘Time Inconsistency’: The Phillips Curve Example (An Analysis for Intermediate Macroeconomics)

Fidelina Natividad-Carlos

No 201307, UP School of Economics Discussion Papers from University of the Philippines School of Economics

Abstract: This paper provides the algebra and a panel diagram to attempt to examine the so-called inflation- unemployment (or Phillips curve, or aggregate supply) example, the most popular example in the literature when introducing the concept of “time inconsistency” or “dynamic inconsistency”. The resulting panel diagram (along with the derivations presented in the appendices) is used to analyze the different possible outcomes, depending on the scenarios – rule or pre-commitment, cheating, and equilibrium – and find out whether there is indeed “time inconsistency” or “dynamic inconsistency” in the said example.

Keywords: Philips curve; aggregate supply; time inconsistency; dynamic inconsistency; short-run optimal policy; long-run optimal policy; rational expectations; rules vs discretion (search for similar items in EconPapers)
JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013-07
New Economics Papers: this item is included in nep-mac
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Published as UPSE Discussion Paper No. 2013-07, July 2013

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Persistent link: https://EconPapers.repec.org/RePEc:phs:dpaper:201307

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