# Behavioural Macroeconomic Policy: New perspectives on time inconsistency

## TL;DR

This paper integrates behavioural microeconomics with macroeconomic policy models to analyze how time inconsistency affects inflation targeting and monetary policy effectiveness, revealing limitations under hyperbolic discounting.

## Contribution

It introduces a unified model combining behavioural discount functions with game theory to study time inconsistency in macroeconomic policy.

## Key findings

- Hyperbolic discounting narrows the enforceable inflation target range.
- Limits to monetary policy effectiveness are identified under certain behavioural assumptions.
- The model provides new insights into macroeconomic policy debates.

## 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.