Preferences switch as the distant becomes instant. 5  Weber (1958). 6  Franke et al (2007). 7  Levine (1997). 8  Thaler and Shefrin (1981). 9  McClure, Laibson, Loewenstein and Cohen (2004). 10  For example, Pigou (1920), Ainslie and Haslam (1992) and Laibson (1997). BIS Review 114/2010  3  In these situations, the double-self becomes a practical reality for both animals and humans. Experimental evidence lends strong support. Hyperbolic discounting has been found in such diverse case studies as pigeons pecking corn, students choosing video games, women choosing anaesthesia in childbirth and drug addicts assessing their next fix. 11 Psychiatrically, it may emerge as multiple personality disorders. Addiction is, in some respects, hyperbolic discounting writ large. 12 It is Pigou’s defective telescope being held the wrong way round. Immediate gratification (drugs, alcohol, sex, food) is sought irrespective of the long-term consequences. There is a neurological explanation for such behaviour. Drugs and some foodstuffs flood the brain with dopamine, which stimulates the midbrain associated with instant reward. This might explain why addictive behaviour appears to be more prevalent in humans than in animals. While few squirrels are dieters, even fewer are glue-sniffers. Impatience has implications for economic and financial systems every bit as profound as its well-behaved twin. For economies, hyperbolic discounting would tend to generate undersaving, as people seek instant gratification. And neo-classical growth theory says that undersaving has adverse implications for long-run investment and growth. Some jam today would come at the expense of a whole jam-jar tomorrow.

This can be done without making statements about the policy instrument in the future. Each month we provide the market with a comprehensive assessment of the risks to price stability over the medium term. This allows market participants to form expectations about the future course of monetary policy, conditional on our real-time assessment of the state of the economy. In this sense, the ECB is predictable, and this minimises the volatility of expectations in normal times. Our quantitative definition of price stability and our medium-term orientation significantly reduce the likelihood of either deflation scares or inflation scares. The firm anchoring of inflation expectations – throughout a time of crisis – meant that we could maintain the rate on our refinancing operations at positive levels without having any materialisation of a deflationary risk or inflationary expectations. The phasing-out process I mentioned that we chose to expand our credit to banks. When executing lending policy, a central bank functions much like a private financial intermediary. Private credit extension is accompanied by restrictions on the borrower to limit its ability to take risks and to protect the value of the loan. If a central bank provides credit support, the analogy suggests that it must follow up with a continuous re-evaluation of the credit conditions to safeguard its funds and make sure its commitment is not abused. It also has to make sure that it does not subsidise certain economic activities nor permanently suppress the private interbank market.