Indeed, the time-inconsistency paradigm articulated by Nobel-prize winners Finn Kydland and Edward Prescott, and applied to central banking by Robert Barro and David Gordon, offered a positive theory for monetary policy-making by surprises. 4 Barro and Gordon showed that policy makers – under certain institutional conditions – might have an incentive to exploit the short-run trade-off between inflation and employment.
In a world in which money illusion cannot last for long, such a policy is only viable if the central bank releases no hints about its objectives, its intentions, and the timing of its actions.