Monday, January 29, 2018

Stephen G. Cecchetti & Kermit L. Schoenholtz — Time Consistency: A Primer

The problem of time consistency is one of the most profound in social science. With applications in areas ranging from economic policy to counterterrorism, it arises whenever the effectiveness of a policy today depends on the credibility of the commitment to implement that policy in the future.
For simplicity, we will define a time consistent policy as one where a future policymaker lacks the opportunity or the incentive to renege. Conversely, a policy lacks time consistency when a future policymaker has both the means and the motivation to break the commitment.
In this post, we describe the conceptual origins of time consistency. To emphasize its broad importance, we provide three economic examples—in monetary policy, prudential regulation, and tax policy—where the impact of the idea is especially notable. (For other examples, see here and here.)
The US has demonstrated a problem with time consistency in making and keeping international agreements.

Money and Banking
Time Consistency: A Primer
Stephen G. Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kermit L. Schoenholtz, Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business

Cecchetti & Schoenholtz are the authors of Money, Banking and Financial Markets.


Neil Wilson said...

What a load of Wizard of Oz expectation fairy crap.

ISTM that what we need is a dynamic model that shows you don't have to care what firms think might happen, they'll have to do it anyway or die.

Which funnily enough is what neo-liberals believe about individuals since they are so desperate to get them into debt.

The whole time consistency dogma is there to show that governments must be constrained and corporations allowed to run riot. We saw where that went ten years ago.

.fadE said...

Yep, more authoritarian nonsense from economists.

Ryan Harris said...

Happy to see economists taking seriously time as more significant. It's so much more than a marker for when measurements were made.