Dynamic Commitment and Imperfect Policy Rules
Examining the dynamics of commitment highlights some neglected features of time inconsistency. We modify the 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 some 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 discretion relatively more attractive. Second, the option to wait means that increased uncertainty makes discretion more attractive. Third, because the commitment decision takes place in "real time," policy choice displays hysteresis.
Haubrich, Joseph G., and Joseph Ritter. 1996. “Dynamic Commitment and Imperfect Policy Rules.” Federal Reserve Bank of Cleveland, Working Paper No. 96-01. https://doi.org/10.26509/frbc-wp-199601