Abstract
Considering the dynamics of commitment highlights some neglected features of time inconsistency problems. We modify the standard rules-versus-discretion question in three ways: (1) A government that does not commit today retains the option to do so tomorrow, (2) the government's commitment capability is restricted to a class of simple rules, and (3) the government's ability to make irrevocable commitments is restricted. Three results stand out. First, the option to wait makes the incumbent regime (rules or discretion) relatively more attractive. Second, the option to wait means that increased uncertainty makes the incumbent regime more attlwactive. Third, because the commitment decision takes place in "real time," policy choice displays hysteresis.
Original language | English (US) |
---|---|
Pages (from-to) | 766-784 |
Number of pages | 19 |
Journal | Journal of Money, Credit and Banking |
Volume | 32 |
Issue number | 4 |
DOIs | |
State | Published - Nov 2000 |
Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2000, Blackwell Publishing Inc.. All rights reserved.