The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England
Like many parents, I used to try disciplining badly-behaved children in the run-up to Christmas by telling them they would receive no presents if they persisted. This worked only fleetingly. My children quickly discovered my threat lacked credibility. The collateral costs of being present-less on Christmas morning were simply too great for anyone (me or Father Christmas) to bear — and they knew it.
This is an example of what economists call a time-consistency problem. For a future action to be credible on announcement, it must still be the smart thing to do when the time comes to act. Even if an announced action is well intended — whether to discipline misbehaving children or financial markets — it will lack credibility and prove ineffective unless following through with it would actually be sensible.