Time-Consistent Rules in Monetary and Fiscal Policy

The intended effects of a government policy can be distorted by the public’s expectations about how strictly it will be enforced. If households and businesses cannot be certain that a policy will remain unchanged over its scheduled tenure, they will adjust their response to it to reflect this uncertainty. One way of mitigating the uncertainty is to add rules to new policies when they are enacted that would make altering the policies very difficult in the future.