Aslongas youcantrustyourpolicymakersandpresume

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Unformatted text preview: o a rule of never negotiating. If policymakers were truly unable to make concessions, the incentive for terrorists to take 5 hostages would be largely eliminated. (Mankiw) Rules vs. Discretion­ Time inconsistency Problem in Monetary Policy Discretion: takdir yetkisi ► From an economic perspective, the issue of time inconsistency emphasizes the problem of unpredictably changing incentives over time. ► In terms of monetary policy discretion at first glance is superior to a fixed policy rule. As long as you can trust your policy makers and presume that they are intelligent and benevolent there might not be an apparent reason to deny them the flexibility in responding to changing conditions. 6 ► A central bank will have better inflation performance in the long­run if it does not surprise people with unexpected expansionary policy. However when monetary policy is at the discretion of policy makers there is always the possibility that in the short run they might use expansionary policy. ► One approach to achieving time consistency in monetary policy is to limit policy to rules that the monetary authority will have an incentive to pursue in all normal future cir...
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