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Unformatted text preview: o in effect nominal anchor means that the monetary authority targets the selected anchor by keeping it at a predetermined level or range.
A major advantage of the nominal anchor is that it can reduce the time inconsistency problem.
3 Time Inconsistency Problem It is a situation where decision makers’ preferences change through time. So lets say that the decision maker makes a commitment today at time t, but after time passes, at time t+n, she might decide to not to commit to that decision and act differently.
Some examples of time inconsistency:
► Smokers’ long term health requires them to quit smoking. A smoker might decide to quit smoking tomorrow. But when tomorrow comes she might change her mind and decide to smoke one more to enjoy the pleasures of smoking in the shortrun!
► To encourage research, the government announces that it will give a temporary monopoly to companies that discover new drugs. But after a drug has been discovered, the government is tempted to revoke the patent or to regulate the pric...
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