Barro and Gordon (1983) were the first to study this problem in the context of monetary policy rules versus discretion. Subsequent work has shown that the time‐inconsistency problem in monetary policy can also be addressed by an appropriate design of the central bank’s objective function. For instance, Rogoff (1985) shows that an “inflation‐conservative” central bank, i.e.
one that is primarily concerned with price stability, eliminates the classic inflation bias, which arises in monetary models where the central bank has an incentive to engineer above‐target inflation.