That said, the peg has provided a stable nominal anchor
for the economy, particularly as contracts for the main export, oil, are typically priced in dollars.
Simply put, during the 2010-2011 biennium--the initial expansive phase of the populist strategy monetary, fiscal and incomes policies adopted a very strong expansionary pace, while exchange rate policy operated as a nominal anchor
to contain the inflationary pressures.
Second, insofar as foreign governments have pegged their exchange rates to the dollar as has China, the dollar acts as a nominal anchor
for their price levels--sometimes in the context of major domestic financial stabilizations.
For both noncontingent nominal financial contracts and nominal price stickiness, it is money's role as a unit of account that is crucial, and in both cases, optimal monetary policy is essentially the choice of a particular nominal anchor
that makes money best perform its unit-of-account function.
The report also highlighted the need to use headline CPI inflation as the principal nominal anchor
for monetary policy.
I expect the headline CPI to be the nominal anchor
," he said.
The mission notes that the exchange rate peg with the Indian rupee serves as a useful nominal anchor
, and welcomes the authorities decision to maintain it.
Recognising that inflationary pressures are mounting and determined to establish a nominal anchor
which will allow us to preserve the internal value of the rupee, we have raised the repo rate by 25 basis points," RBI governor (http://www.
Nevertheless, the countries' open economies with their easy flow of goods and labour have largely underpinned the fixed exchange rate as a credible nominal anchor
The quantity theory imputes causality to monetary disturbances based on central bank behavior that flouts the need to provide a nominal anchor
and to allow the price system to work.
Hetzel, however, maintains that the remarkable economic performance during most of these years resulted from what he calls the use of an implicit "rule" by the Fed that established a nominal anchor
in the form of a low, stable expected inflation rate.
The second is concerned to what extent a tight credit policy (to contain inflationary impact) may provide a nominal anchor
under imperfect asset substitutability.