Dynamic inconsistency and monetary policy management

This paper studies the importance of the dynamic inconsistency of monetary policy. The paper is organized as follows: in the first part the concept of dynamic inconsistency is explained; the next sections analyse the the rules versus discretion dilemma and some solutions to counteract the dynamic inconsistency of monetary policy - delegate monetary policy to an independent and conservative central banker; offering to the central banker a performance contract, in which his salary is directly linked to the performance of some important macroeconomic variables such as GDP and inflation rate; inflation targeting strategy. The last section briefly presents the management of monetary policy in Romania after adoption of inflation targeting strategy.