Delegation, time inconsistency and sustainable equilibrium

Henrique S. Basso ()

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 8, pages 1617-1629

Abstract: This paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government's strategy. The method of Chari and Kehoe [1990. Sustainable plans. Journal of Political Economy 98 (4), 783-802] is applied to characterize the entire set of sustainable outcomes. Countering McCallum's [1995. Two fallacies concerning central-bank independence. American Economic Review 85 (2), 207-211] second fallacy, delegation is able to eliminate the time inconsistency problem, with the commitment policy being sustained under discretion for any intertemporal discount rate.

Keywords: Central; bank; Monetary; policy; Institutional; design (search for similar items in EconPapers)
Date: 2009

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Working Paper: Delegation, Time Inconsistency and Sustainable Equilibrium (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:8:p:1617-1629

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