TIME-INCONSISTENCY, DEMOCRACY, AND OPTIMAL CONTINGENT RULES

In a stochastic world there appears to be a trade-off between the nece ssary 'tying of hands' to conquer the effects of time-inconsistency at the desirability of flexible response. However, it is in principle po ssible for the electorate to achieve an optimal outcome by use of disc riminatory electoral punishment, provided it has access to all relevan t macro data prior to the election. Alternatively it could punish an i ndependent central bank mandated to pursue this outcome (but impotent without such a mandate): this has advantages in information and flexib ility and allows elections to concentrate on non-consensual issues.