Expansionary monetary policy may produce higher growth and employment in the short run, and, therefore, policymakers may be tempted to pursue this policy, even in the short run although there is no guarantee that there would be a favourable output impact. In the long run, however, such an expansionary monetary policy will necessarily lead to higher inflation with deleterious consequences for the economy.
In order to solve the time inconsistency problem, two distinct approaches have been advanced. The 'conservative central banker approach' postulates the appointment of a conservative central banker whose aversion  2  BIS Review 82/2001  to inflation is well known which would result in low inflation because of the economic agents' belief in the reputation of the central banker.