Time Consistency

Time consistency refers to the principle that a strategy or policy that is optimal at one point in time remains optimal in the future, even as circumstances change. In economics and finance, time consistency is important for long-term decision-making, as it ensures that a strategy that works today will not be abandoned or adjusted later in a way that contradicts the original objectives. Time inconsistency occurs when decision-makers alter their strategies due to short-term considerations, undermining long-term goals.

Example

A central bank may commit to a long-term inflation target, but if it abandons this target due to short-term economic pressures, the policy would be considered time inconsistent.