Money, Banking and Financial Markets

Primers

Primers

 
 
Posts tagged Policy commitment
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....

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Steve Cecchetti and Kim SchoenholtzPrimer, Time consistency, Dynamic inconsistency, Strategy, Policy commitment, Credibility, Rules vs. discretion, Constrained discretion, Institutional design, Policy framework, Transparency, Communications, Monetary policy, Central bank independence, Inflation targeting, Inflation, Inflation expectations, Too big to fail, TBTF, Bailout, Capital requirements, Resolution, Stress test, Taxation, Capital, Tax treaty, Fiscal sustainability, Investment treaty
The Phillips Curve: A Primer

Economists have debated the relationship between inflation and unemployment at least since A.W. Phillips’s study of U.K. data from 1861 to 1957 was published 60 years ago. The idea that a tight or slack labor market should result in faster or slower wage gains seems like a natural corollary to standard economic thinking about how prices respond to deviations of demand from supply. But, over the years, disputes about this Phillips curve relationship have been and remain fierce.

As the U.S. labor market tightens, and unemployment approaches levels we have not seen in more than 15 years, the question is whether inflation is going to make a comeback. More broadly, how useful is the Phillips curve as a guide for Federal Reserve policymakers who wish to achieve a 2-percent inflation target over the long run?

To anticipate our conclusion, despite evidence of a negative relationship between wage inflation and unemployment, central banks ought not rely on a stable Phillips curve for setting monetary policy.

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Steve Cecchetti and Kim SchoenholtzPhillips curve, Inflation, Expected inflation, Unemployment, Natural rate of unemployment, Monetary policy, Policy commitment, Forward-looking expectations, Backward-looking expectations, Primer