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, again interfering with maintaining price stability. the federal reserve, for example, was asked to directly underwrite government debt during world war i, but a statutory prohibition on directly purchasing government debt was later added to the federal reserve act. some have worried that even an independent central bank could succumb to the temptation to stimulate the economy today at the expense of higher inflation in the future. this is referred to as the problem of time inconsistency. that is, the central bank has an incentive to commit itself to price stability and then to renege on this promise in order to gain employment in the short run with relatively little initial sacrifice in the form of higher inflation. in the long run inflation would rise and the central bank would either have to tolerate the higher rate of inflation or push output below potential for a while to restore price stability. once the public understood this process, moreover, it would expect higher inflation, so that, in the longer run, the result could be higher inflation without any short - run gain in output. several solutions to the time inconsistency problem have been offered. first, the rest of government could impose a rule on the central bank, restricting its ability to play the game described above. the rule would ensure a credible commitment to price stability, thereby anchoring the public ’ s expectations and removing the inflationary bias that otherwise might result. second, the government could appoint conservative central bankers - central bankers with a greater commitment to price stability than the public - and thereby offset the inflationary bias that would otherwise arise. third, central bankers could be forced to operate under performance or incentive contracts, whereby they could be penalised for failure to maintain price stability. the governor of the bank of new zealand operates under such a performance contract ; he can be removed from office for failure to achieve his inflation target. i have never found the literature on time inconsistency particularly relevant to central banks. surely central banks realise they are facing a repeated game, not a one - time game. they will therefore be reluctant to undermine their credibility over the longer run by pretending to pursue price stability while stimulating the economy for short - run gain. long terms and other institutional ways of insulating central banks from short - term political pressures allow central bankers to take this longer view and make them less likely to follow time - inconsistent policies. still, the problem highlighted in the time inconsistency literature may reinforce the case for both a price stability legislative mandate and instrument independence for the central