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Time Inconsistency of Benevolent Government Economies

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  • Tesfatsion, Leigh S.

Abstract

Why do government policymakers in open-ended dynamic economic models with period-by-period re-optimization tend to exhibit time inconsistency, in the sense that they systematically deviate in later periods from earlier planned policy paths? This article develops necessary and sufficient conditions for time consistency for a general class of dynamic Walrasian economies that includes many previous economic models (Brock, Calvo, Kydland-Prescott, Fischer, etc.) as special cases. It is shown that the time inconsistency of government policymakers can be explained in this class of models as the consequence of successive structural changes in the constraints faced by the government policymakers as private agents carry out decisions in each successive time period conditional on anticipated future government policy settings. Annotated pointers to related work can be accessed at: http://www2.econ.iastate.edu/tesfatsi/dehome.htm

Suggested Citation

  • Tesfatsion, Leigh S., 1986. "Time Inconsistency of Benevolent Government Economies," Staff General Research Papers Archive 11206, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:11206
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    Cited by:

    1. P.J. Hammond, 2007. "History: Sunk Cost, or Widespread Externality?," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 115(2), pages 161-185.
    2. Leigh Tesfatsion, 2017. "Elements of Dynamic Economic Modeling: Presentation and Analysis," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(2), pages 192-216, March.
    3. Daniel Klein, 1990. "The microfoundations of rules vs. discretion," Constitutional Political Economy, Springer, vol. 1(3), pages 1-19, September.
    4. Hoyt, William H. & Jensen, Richard A., 1996. "Precommitment in a system of hierarchical governments," Regional Science and Urban Economics, Elsevier, vol. 26(5), pages 481-504, August.
    5. William H. Hoyt & Richard A. Jensen, 1995. "Precommitment and State and Local Policy Coordination," Public Economics 9508001, University Library of Munich, Germany.
    6. Reyer Gerlagh & Thomas Michielsen, 2015. "Moving targets—cost-effective climate policy under scientific uncertainty," Climatic Change, Springer, vol. 132(4), pages 519-529, October.

    More about this item

    Keywords

    time inconsistency; macroeconomic policy; benevolent government;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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