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SOCIAL CHOICE AND TIME CONSISTENCY WITH LOW-PROBABILITY EVENTS

Published online by Cambridge University Press:  06 June 2016

Claudio A. Bonilla
Claudio A. Bonilla*
Affiliation:
University of Chile
*
Address correspondence to: Claudio A. Bonilla, School of Economics and Business, University of Chile, Diagonal Paraguay 257, Suite 1905, Santiago de Chile, Chile; e-mail: cbonilla@fen.uchile.cl.
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Abstract

A key result in macroeconomics is the “time inconsistency of short-run optimal plans.” It is argued that inflationary bias results if central bankers do not precommit to a monetary policy rule. The macro literature, however, does not address the way in which board members arrive at the “optimal choice of inflation rate.” That is a matter of a micro subfield called social choice. If we consider that on any board, members have different priors about the states of nature for the economy, but they all receive the same signal before deciding, then they will have different posterior probabilities for the states, even if they have many data, if one state has a low probability of occurring, such as an unlikely catastrophic-risk event. Thus, it is not clear what the optimal plan is. Therefore, discretion rather than rules may be the optimal plan in social choice settings.

Keywords

Social ChoiceTime ConsistencyLow-Probability Event
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 7 , October 2017 , pp. 1706 - 1711
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

This paper originated from conversations between the author and Mel Hinich, and it can be considered a continuation of Melvin Hinich (2003), Risk when some states are low probability events. Macroeconomic Dynamics 7, 636–643. I am heavily in debt to Mel for his friendship and guidance. Mel rests in peace.

References

REFERENCES

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