Glossary · Macro · Monetary policy

Time inconsistency

The problem that the best plan announced in advance stops being the best plan once people have acted on it. A central bank that promises low inflation is tempted, once wages are set, to inflate a little for a burst of jobs. Because everyone knows this, the promise is not believed unless the bank ties its own hands.

Taught in: Credibility, Forward Guidance & the Lucas Critique

Related terms

Inflation bias Central bank credibility

More from monetary policy

Central bank tools Discount rate Forward guidance Interest on reserves (IOR)Liquidity trap Lucas critique

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