"Deus ex machina wanted: time inconsistency of time consistency solutions in monetary policy. "  

Florrin O. Bilbiie
Nuffield College, University of Oxford
CEP, London School of Economics and EUI, Florence

Abstract:	
This paper argues that delegation (optimal institutional design) is not a solution
to the dynamic inconcistency problem, and can even reinforce it. We show that 'optimal' 
delegation is not consistent with government's incentives. We solve for delegation 
schemes that are consistent with these incentives and find that they imply 'no delegation'. 
Introducing a cost of reappointing the central banker just postpones the problem, and can 
only solve it if the government is infinitely averse to changing central bank's contract. 
Our results hint to: (i) alternative explanations for good anti-inflationary performance; 
(ii) strengthening central bank independence and (iii) giving a more prominent role to 
Central Bank reputation building in fighting inflation.