Although it sounds profoundly theoretical, the work on time inconsistency and policy commitment delivers concrete implications and relevance for governance. "Good policy," the economist clarifies, "presumably would take into account the effect future policy has on earlier decisions. The problem is: when that future arrives, those decisions have already been made. Especially if a government finds itself in a bit of an emergency situation, which governments somehow often do, they’ll have an incentive to focus more on the short term and abandon continuation of their policy."
One reason policies are easily cast aside in times of turmoil is that economic policies (and fiscal policies in particular) are regulated by elected governments, and therefore the whim of the politicians in charge at the time. These policies are subject to change in the long run or are inconsistent. Politicians don’t always commit to policies once elected. Indeed, there is no conceivable way to make sure that their commitments matter. "Sometimes I joke that this is such an important problem, if some young hotshot economist comes up with a way to commit to good future fiscal policy, he will probably stand in front of the King of Sweden and receive a prize," Kydland says with a smile.
To make sure those in power stay dedicated to policies that are consistent over time, Kydland and Prescott focused on the regulation of monetary policy, which is a matter for central banks. The conclusion that followed from their groundbreaking work, suggests that central banks should be kept impartial to government pressure. Simply put, the work justifies the independence of central banks as the way to make sure the policies remain consistent over time.