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arxiv: 1907.07858 · v1 · pith:6K2JKJRXnew · submitted 2019-07-18 · 💰 econ.TH · econ.GN· q-fin.EC

Behavioural Macroeconomic Policy: New perspectives on time inconsistency

Michelle Baddeley This is my paper

Pith reviewed 2026-05-24 19:39 UTC · model grok-4.3

classification 💰 econ.TH econ.GNq-fin.EC
keywords time inconsistencyhyperbolic discountingmonetary policyinflation targetsbehavioral economicsgame theorypolicy credibility
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The pith

Embedding hyperbolic discounting into game-theoretic models of monetary policy narrows the enforceable range of inflation targets.

A machine-rendered reading of the paper's core claim, the machinery that carries it, and where it could break.

The paper integrates behavioral economics discount functions with macroeconomic analysis of time inconsistency in policy. It builds an encompassing model that nests time-consistent and time-inconsistent preferences by substituting hyperbolic or quasihyperbolic discounting into a game of temptation versus enforcement. This shows that such discounting shrinks the set of inflation targets a policy maker can credibly sustain. A reader should care because the result points to concrete limits on how well standard monetary targets can work when agents discount the future in the ways behavioral evidence suggests.

Core claim

Substituting hyperbolic or quasihyperbolic discounting into the game-theoretic representation of temptation versus enforcement produces an encompassing model in which the enforceable range of inflation targets is narrowed, implying limits to the effectiveness of monetary targets under certain conditions.

What carries the argument

Encompassing model that nests combinations of time-consistent and time-inconsistent preferences by embedding behavioural discount functions into the temptation-enforcement game.

If this is right

  • Monetary targets have limited effectiveness under behavioral discounting.
  • The set of sustainable inflation rates contracts when agents use hyperbolic or quasihyperbolic discounting.
  • Policy credibility problems intensify for targets that would have been enforceable under exponential discounting.
  • The same framework can examine mixtures of consistent and inconsistent preferences.

Where Pith is reading between the lines

These are editorial extensions of the paper, not claims the author makes directly.

  • Fiscal or regulatory rules might show analogous narrowing if behavioral discounting is introduced into their enforcement games.
  • Central banks could test the model by measuring whether announced targets correlate with observed population discount rates across countries.
  • Communication strategies that alter perceived future payoffs might expand the enforceable range even under hyperbolic discounting.

Load-bearing premise

The game-theoretic representation of temptation versus enforcement still correctly captures the strategic interactions that determine enforceable targets once behavioral discount functions replace standard ones.

What would settle it

Data showing that inflation targets outside the narrowed range remain credibly enforced in economies where population discount functions are measurably hyperbolic would contradict the central result.

read the original abstract

This paper brings together divergent approaches to time inconsistency from macroeconomic policy and behavioural economics. Behavioural discount functions from behavioural microeconomics are embedded into a game-theoretic analysis of temptation versus enforcement to construct an encompassing model, nesting combinations of time consistent and time inconsistent preferences. The analysis presented in this paper shows that, with hyperbolic/quasihyperbolic discounting, the enforceable range of inflation targets is narrowed. This suggests limits to the effectiveness of monetary targets, under certain conditions. The paper concludes with a discussion of monetary policy implications, explored specifically in the light of current macroeconomic policy debates.

Editorial analysis

A structured set of objections, weighed in public.

Desk editor's note, referee report, simulated authors' rebuttal, and a circularity audit. Tearing a paper down is the easy half of reading it; the pith above is the substance, this is the friction.

Referee Report

2 major / 0 minor

Summary. The paper embeds hyperbolic and quasihyperbolic discount functions from behavioral economics into a game-theoretic model of temptation versus enforcement in monetary policy, nesting time-consistent and time-inconsistent preferences, and concludes that this narrows the enforceable range of inflation targets relative to standard exponential discounting, with implications for the effectiveness of monetary targets.

Significance. If the narrowing result is correctly derived, the paper would usefully connect behavioral micro-foundations to macro policy analysis, highlighting potential limits on inflation targeting under time-inconsistent preferences and informing current policy debates.

major comments (2)
  1. [Abstract] Abstract: the central claim that hyperbolic/quasihyperbolic discounting narrows the enforceable range of inflation targets is stated without any derivation steps, explicit equations, or robustness checks. This makes it impossible to assess whether the result follows from the model construction or from particular functional forms and parameter values chosen for the discount function.
  2. [Model/analysis (as described in abstract)] The game-theoretic construction: direct substitution of (β,δ) preferences into standard repeated-game incentive constraints (temptation versus enforcement) assumes the usual subgame-perfect trigger strategies and one-shot deviation principle remain valid. For time-inconsistent players this requires re-derivation under sophisticated or naive hyperbolic equilibrium concepts, because continuation values become time-dependent and effective discounting on punishment phases changes with the evaluation date; without this adjustment the set of enforceable targets may be mis-stated.

Simulated Author's Rebuttal

2 responses · 0 unresolved

We thank the referee for the careful and constructive report. The comments raise important issues about the clarity of the abstract and the handling of equilibrium concepts under time-inconsistent preferences. We address each major comment below and will revise the manuscript to strengthen the presentation.

read point-by-point responses

  1. Referee: [Abstract] Abstract: the central claim that hyperbolic/quasihyperbolic discounting narrows the enforceable range of inflation targets is stated without any derivation steps, explicit equations, or robustness checks. This makes it impossible to assess whether the result follows from the model construction or from particular functional forms and parameter values chosen for the discount function.

    Authors: The abstract is intended as a concise overview. The full derivation of the narrowing result, including the explicit incentive constraints under exponential, hyperbolic, and quasihyperbolic discounting, appears in the main text together with numerical checks across parameter values. To address the concern, we will revise the abstract to include the central incentive-compatibility condition and a note on robustness to the choice of discount parameters. revision: yes

  2. Referee: [Model/analysis (as described in abstract)] The game-theoretic construction: direct substitution of (β,δ) preferences into standard repeated-game incentive constraints (temptation versus enforcement) assumes the usual subgame-perfect trigger strategies and one-shot deviation principle remain valid. For time-inconsistent players this requires re-derivation under sophisticated or naive hyperbolic equilibrium concepts, because continuation values become time-dependent and effective discounting on punishment phases changes with the evaluation date; without this adjustment the set of enforceable targets may be mis-stated.

    Authors: We model sophisticated agents who correctly anticipate their future selves. The incentive constraints are written from the current self’s perspective, incorporating the time-dependent continuation values. We nevertheless agree that an explicit re-derivation of the one-shot deviation principle and subgame-perfect conditions under (β,δ) preferences will improve rigor. We will add this derivation in a revised section or appendix and confirm that the narrowing result continues to hold. revision: yes

Circularity Check

0 steps flagged

No circularity: substitution of external discount functions yields independent narrowing result

full rationale

The paper substitutes standard hyperbolic and quasihyperbolic discount functions (imported from behavioural microeconomics) into an existing repeated-game model of monetary-policy temptation versus enforcement. The claimed narrowing of the enforceable inflation-target range is the direct mathematical consequence of that substitution into the incentive-compatibility conditions; it is not obtained by fitting parameters to the target data, by self-defining the outcome, or by a load-bearing self-citation chain. No equation is shown to equal its own input by construction, and the equilibrium concept remains the standard subgame-perfect one. The derivation is therefore self-contained against external benchmarks.

Axiom & Free-Parameter Ledger

0 free parameters · 2 axioms · 0 invented entities

The model rests on standard game-theoretic and macroeconomic assumptions plus the behavioral discount functions taken from prior literature; no new entities are introduced and no free parameters are explicitly fitted in the abstract.

axioms (2)
  • domain assumption Game-theoretic representation of policymaker-private agent interaction accurately models temptation and enforcement
    The abstract states that behavioral discount functions are embedded into this game-theoretic analysis.
  • domain assumption Hyperbolic and quasihyperbolic discount functions correctly capture time-inconsistent preferences
    The abstract invokes these functions as the behavioral component.

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Reference graph

Works this paper leans on

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