What causes Time Inconsistency insufficient Policy Instruments: One can easily find that there is no time inconsistency in the second model if the government is allowed to levy lump-sum tax (or proportional income tax? ). However, this explanation seems not satisfactory since it can't explain why time inconsistency rises in the first model Persson and Tabellini(1994)argue that Ti is due to the sequential nature of policy-making. This, again, is only partially correct Now most economists believe that TI 3 is induced by the heterogeneity of i interests, or equivalently some externality. This is first pointed out by Chari, Kehoe and Prescott(1989). BeWhat Causes Time Inconsistency • Insufficient Policy Instruments: One can easily find that there is no time inconsistency in the second model if the government is allowed to levy lump-sum tax (or proportional income tax?). However, this explanation seems not satisfactory since it can’t explain why time inconsistency rises in the first model. • Persson and Tabellini (1994) argue that TI is due to the sequential nature of policy-making. This, again, is only partially correct. • Now most economists believe that TI is induced by the heterogeneity of interests, or equivalently, some externality. This is first pointed out by Chari, Kehoe and Prescott (1989)