Time-Inconsistency, Democracy, and Optimal Contingent Rules.

In a stochastic world there appears to be a trade-off between the necessary 'tying of hands' to conquer the effects of time-inconsistency and the desirability of flexible response. However, it is in principle possible for the electorate to achieve an optimal outcome by use of discriminatory electoral punishment, provided it has access to all relevant macro data prior to the election. Alternatively, it could punish an independent central bank mandated to pursue this outcome (but impotent without such a mandate): this has advantages in information and flexibility and allows elections to concentrate on nonconsensual issues. Copyright 1995 by Royal Economic Society.