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Macroeconomic Theory$
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Jean-Pascal Benassy

Print publication date: 2011

Print ISBN-13: 9780195387711

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:osobl/9780195387711.001.0001

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Dynamic Consistency and Credibility

Dynamic Consistency and Credibility

Chapter:
(p.466) 19 Dynamic Consistency and Credibility
Source:
Macroeconomic Theory
Author(s):

Jean-Pascal Bénassy

Publisher:
Oxford University Press
DOI:10.1093/acprof:osobl/9780195387711.003.0019

This chapter analyzes the issues of time consistency and credibility in fiscal and monetary policy making. It briefly describes the article by Finn Kydland and Edward Prescott which introduced the dynamic consistency problem. It provides a simple characterization of the dynamic consistency problem and then uses capital taxation as an example to demonstrate the issue of the dynamic consistency problem. It also studies how the problem of dynamic consistency can interfere with the design of monetary policy regarding inflationary bias, and provides possible solutions to these problems.

Keywords:   fiscal policy, monetary policy, Finn Kydland, Edward Prescott, dynamic consistency problem, inflationary bias

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