Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as
A)inflation targeting.
B)the monetary policy reaction lag.
C)the time inconsistency of policy.
D)the sacrifice ratio dilemma.

Question

Quizplus · Accepted Answer

Prescott and Kydland's work on the time inconsistency of policy highlighted the problem where policymakers have an incentive to deviate from previously announced policies if people expect those policies to be adhered to, such as promising zero inflation but then increasing inflation to boost output.

Edward Prescott and Finn Kydland Won the Nobel Prize in Economics