On the Dynamic Consistency of Optimal Monetary Policy

The literature on the time inconsistency of optimal monetary policy puts forward the idea that a central bank may strategically exploit the first mover advantage against the private sector, manipulating expectations so as to achieve a higher level of employment and output. We argue that this view is questionable. Once we take into account that expectations can not be considered as choice variables, and the rule of expectation formation is common knowledge to all players, there may not be room for time inconsistency of monetary policy any more.