Question

In what sense can greater central bank independence make the time-inconsistency problem worse?

Short answer

The advantage of having so many channels through monetary policy can operate is the freedom of having multiple ways to stimulate economy whereas, the disadvantage is that these various channels indicate many ways that output and inflation might change.

Step-by-step solution

Content Introduction

The central bank choose from a variety of methods when restoring stability in inflation and output so when one method does not work, there brings various other alternative.

Content Explanation

There is less formal accountability for central banks to follow stable inflation policies when they are more independent. In this way, it's simpler for central banks to provide the impression of wanting to pursue low inflation policies while actually adopting more expansionary policies to reduce unemployment and boost output. Even with greater central bank independence, the problem of time inconsistency can be mitigated to some extent through greater transparency and communication, which means that the public is less likely to be misled into false expectations, and thus the central bank is less likely to pursue overly inflationary policies to boost output and lower unemployment in the short term.