CREDIBILITY AND INTERTEMPORAL CONSISTENCY

Abstract

The credibility criterion commonly used in the strategic macroeconomic policy literature, subgame perfection or its variants, ignores a critical problem concerning intertemporal consistency of policy announcements. To capture this additional credibility constraint, this note applies two distinct notions of Renegotiation-Proof, originally proposed in the context of two-person repeated games. Macroeconomic policy games, where the benevolent government interacts with atomistic private agents, offers a new testing ground for these criteria to be evaluated. This note discusses the relative strengths and weaknesses of these criteria.