We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Why does the problem of time-inconsistency arise in the implementation of monetary policy and how can it be mitigated - Essay Example


Extract of sample
Why does the problem of time-inconsistency arise in the implementation of monetary policy and how can it be mitigated

Time-inconsistency is related to the change in apparent value of policies as time progresses, with decisions being made at one point in time due to the situation then, but changed later as the situation changes. In simplistic terms, time-inconsistency is where policies were considered to be optimal at one point, are no longer considered to be so with the passing of time and so are not implemented (Federal Reserve Bank of San Francisco, 2003). If those that are involved in making policy cannot commit to policies for the future, then this leads to higher inflation rates than if they can commit. The consequence of this is an inflation bias that occurs systematically (Albanesi et al., 2001). Therefore, time-inconsistency occurs because policy makers work off present knowledge, rather than attempting to make policies that will also be effective in the future. The problem of time-inconsistency arises because of the interplay between costs and benefits of inflation, and it can occur in a number of different models of the economy (Albanesi et al., 2001). ...
Despite widespread theory and evidence of the prevalence of time-inconsistency, Albanesi et al. (2001), showed that for two models of the economy: the cash-credit good model and the limited participation model under a wide range of parameters there was no time-inconsistency problem even though the manager in the models could not commit to policies in the future. They concluded that the time-inconsistency problem is not severe in monetary policy

Check these samples - they also fit your topic

Monetary Policy
One of these important functions includes the regulation of money supply in the country. This is dealt by the monetary policy of that particular country that has its limitations and demand serious attention from not only the policy makers but also the public who would have to follow these policies.
3 pages (750 words)Essay
Greenenergy concentrated on expanding its products portfolio and reaching out to new markets with its products. In 1999, Greenenergy introduced ultra low sulphur petrol in Japan, Hong Kong, and France. The product had been introduced in the UK market in the previous year.
11 pages (2750 words)Essay
Monetary policy
Moral hazard occurs when borrowers are actually tempted to engage in activities that are undesirable for the lender while adverse selection takes place before any transaction occurs whereby the borrowers are most likely to produce negative outcome for the lender who is most likely seeking loans and are most likely to be chosen for the loans requested for (Haan & Eijffinger, 2005).
10 pages (2500 words)Assignment
Monetary policy
The semi-pegged currency system dictates that all governments forming the European Union keep their currencies within a specified range. It stipulates that no currency of any given European Union member should fluctuate beyond 2.25 percent from the agreed and set central limit.
4 pages (1000 words)Essay
Monetary Policy

Financial markets are further divided into money markets and capital markets. Money markets deal in securities with a maturity date within one year. Capital markets mature in longer time frames. Bonds are debts with a maturity date, the investor loaned the business money. A stock has no maturity date; the investor owns a portion of the business.

8 pages (2000 words)Essay
Monetary policy
This implies that it is that rate which is charged by financial institutions in Australia’s banking sector to other banks for overnight loans. This official cash rate is an important monetary policy instrument that influences other interest rates within the market.
5 pages (1250 words)Essay
Monetary policy
This starts from the macro and the micro levels of the economy (Stationery Office, 2006 p. 34). The economic stability of a country/state depends on the effectiveness of economic policies advanced in order to regulate the fiscal activities within the country and at the international levels.
8 pages (2000 words)Essay
Monetary Policy
Without a sound monetary policy, our economy would spin out of control. The policies that are conducted by the Federal Reserve Board (The Fed) are the are some of the most influential factors that affects our economic livelihood. Monetary policy attempts to influence demand for products by increasing and decreasing short term interest rates charged to banks for Federal Funds.
2 pages (500 words)Essay
A. Explain how the Working Time Directive (WTD)of the European Union represents a necessary health and safety measure which protects workers. B. Does the reality of the implementation of the EU's Working Time Directive threaten to undermine the c
The challenge of work-life balance is, thus, to strike a compromise between the competing interests via managing the working hours. Introduced under the European Union treaties enabling the adoption of laws by qualified majority vote on
7 pages (1750 words)Essay
How do stock price volatility affect monetary policy
Stock markets are the non-physical facilities in a country basically used for economic transactions. They directly determine the economic strengths of the country as well as its development. The changes in the stock prices have a significant impact on the
11 pages (2750 words)Essay
and that there was no inflation bias in the models studied. This result was extended to conclude that time-inconsistency does not play as big a role in the economy as other studies argue. There are suggestions that while inflation bias may have been important during the inflation increase in the 1970’s, it is not important under today’s society (Surico, 2003). One method of mitigating the problem of time-inconsistency was tried in a New Zealand bank, where the government employment contract contained the clause that the Governor could be dismissed if the inflation rate was more than a certain amount above the government’s target. In the Euro system, the problem of time-inconsistency has been solved by banking strategy and transparency to the public about policy and expectations (Mersch, 2006). Mitigating the time-inconsistency problem appears to involve making policy decisions clear to the public and the private sector, as well as making policy decisions predictive, taking into account both events that may happen, and the situation when policy decisions were originally made. Time-inconsistency is a problem that is thought to have been the cause of the great inflation of the 1970’s, and caused by policy makers changing policies as time
Cite this document
  • APA
  • MLA
(“Why does the problem of time-inconsistency arise in the implementation Essay”, n.d.)
Why does the problem of time-inconsistency arise in the implementation Essay. Retrieved from https://studentshare.org/macro-microeconomics/1431233-why-does-the-problem-of-time-inconsistency-arise
(Why Does the Problem of Time-Inconsistency Arise in the Implementation Essay)
Why Does the Problem of Time-Inconsistency Arise in the Implementation Essay. https://studentshare.org/macro-microeconomics/1431233-why-does-the-problem-of-time-inconsistency-arise.
“Why Does the Problem of Time-Inconsistency Arise in the Implementation Essay”, n.d. https://studentshare.org/macro-microeconomics/1431233-why-does-the-problem-of-time-inconsistency-arise.
  • Cited: 0 times


The time-inconsistency problem is a problem that is well documented in literature, and is related to policy making and inflation. Time-inconsistency has often been considered to be the cause of the so-called great inflation of the 1970’s in the US, as well as the decrease in inflation that has lasted from the 1980’s to the present day (Surico, 2003). …
Why does the problem of time-inconsistency arise in the implementation of monetary policy and how can it be mitigated
Read TextPreview
Comments (0)
Click to create a comment or rate a document
Let us find you another Essay on topic Why does the problem of time-inconsistency arise in the implementation of monetary policy and how can it be mitigated for FREE!
Contact us:
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us