Question

expain the proble of time inconstistency:is an andependent central ban the answer?why?

Answer 1

ANSWER:

The time inconsistency arises whenever a policy maker can publicly commit to a specific policy action in a non-binding way. It can be defined as a tendency for makers of policy to deviate from a pre-announced optimal policy once agents in the economy have adjusted their expectations and behavior based on the policy which was pre-announced. The time-inconsistency problem can be prominently solved with an inherent to monetary policymaking that consists of delegating monetary policy to an independent central bank by an appropriately designed inflation target or contract. Independence resulted from features such as irreversible policy decisions, long terms (without reappointment) for Executive Board members, and the requirement for a treaty modification to alter the ECB structure or its price stability mandate. Research supports that the more independent the central bank the lower the rate of inflation thus solve the problem of time-inconsistency.