Reputation and Time Consistency
Recent work has shown that reputational arguments based on trigger strategies can sometimes be used to deal with the problem of time inconsistency in government policy.' This idea was exploited by Robert Barro and David Gordon (1983) in a model of inflation and by V. V. Chari and Patrick Kehoe (1988) in a model of capital taxation. Here it is shown that reputational arguments of this sort are widely applicable.2 A general policy model is developed, based on an economy that is stationary over time, contains identical households, and has no endogenous state variables. It is shown in general that the infinite-horizon version of this model has equilibria in trigger strategies that yield outcomes strictly better than those attainable as equilibria in the one-period model.
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