Explain the concept of time consistency. Is the Taylor rule time consistent? Why or why not?

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Time consistency is a concept which mainly deals with the issues of time and actions in time. This signifies that maintaining some factors consistent with time and it is much broader question than commonly understood. Maintaining some factors consistent with time ensures that not only consistency but also to control the effects of the time passage.

Time consistency results in a kind of issue for the decision maker particularly to a policymaker whereby he prefers to implement one policy in advance but when the time of implementation comes he favors the other policy. Knowing this, others will not find the commitment to the first policy credible.

Taylor’s rule can be seen as the proposed guidelines related to the operations of the central banks such as FED related to the changes in the interest rates in response to the changing economic situations. As in Taylor’s rule, the main focus remains on changing the policy with changing economic circumstances, thus it cannot be characterized as time consistent.

Rahul Sunny answered 2 years ago

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Explain the concept of time consistency. Is the Taylor rule time consistent? Why or why not?

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