Time-inconsistency problem: less common than we think
Abstract
Purpose
The purpose of this paper is to make an empirical analysis concerning time-inconsistency problem (TIP) based on a sample of 12 countries for the period from 1993 to 2011.
Design/methodology/approach
The existence of TIP only makes sense if there is a trade-off between inflation and unemployment and when there is a causal relationship indicating that with more inflation, unemployment is reduced (as suggested by the Phillips curve). Hence, TIP is observed by testing the existence of cointegration between inflation rate and unemployment rate series and analyzing the sign of the estimated coefficient of the cointegration vector.
Findings
The findings indicate that the large majority of countries in the sample have policies that are consistent with long-term goals. Furthermore, it is possible to conjecture that the traditional argument that developing countries have weak institutions and thus present a fertile ground for TIP or that the adoption of inflation targeting (IT) can avoid TIP is not necessarily true.
Originality/value
This study sheds light on four important issues. First, has the change in the mindset of the monetary policy management from the 1990s eliminated TIP? Second, is TIP a sickness only for developing countries? Third, is IT associated with TIP? Fourth, has the TIP increased around the world due to the subprime crisis? In short, this paper is an advance on the empirical literature on TIP and it is a very important overview for observing the present day conduct of the monetary policy through the international experience.
Keywords
Acknowledgements
JEL Classifications — E31, E52, E61
Citation
Cesar Albuquerque Bastos, J., Ferreira de Mendonça, H. and Montes, G. (2014), "Time-inconsistency problem: less common than we think", Journal of Economic Studies, Vol. 41 No. 5, pp. 708-720. https://doi.org/10.1108/JES-12-2012-0168
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited