Nominal Anchor

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Nominal Anchor

A government policy that provides stability to an economy at the expense of some of that government's autonomy. For example, if a government pegs its currency to another, it reduces the uncertainty in exchange rates but also gives the government less ability to combat inflation or otherwise change the money supply.
References in periodicals archive ?
The GCC pegs have proved to be successful nominal anchors, and even if they are adjusted rather than abandoned, this would add uncertainty about future adjustments, and ultimately make the pegs more vulnerable to speculative attacks.
This strategy was jointly implemented with a monetary policy that implied highly negative real interest rates and used the exchange rate and public utility rates as the main nominal anchors.
How the central bank does so depends on a choice of one of two possible nominal anchors determined by a choice of one of two possible instruments.
Masson, Savastono and Sharma (1998), however, noted that since the early 1990s, an increasing number of countries, beginning with the more advanced economies, have adopted an explicit value for inflation as an alternative intermediate target in their effort to address the difficulties that developed with the use of exchange rates and monetary aggregates as the nominal anchors.
Secondly, the existence of the real and nominal anchors for a whole series of micro and macroeconomic variables is (due) bound to introduce directly (and reciprocally) causalities and conditionings between the two convergence processes.
The fact that causality ran only unidirectionally from either the exchange rate or the money supply to prices and not the other way around, strengthens the presumption that the nominal anchors are properly identified.
All of them have established sufficient credibility of their authorities to enable them to pursue autonomous monetary policies with domestic nominal anchors (typically an inflation target) and floating exchange rates.
To recap, each of the most popular variables that have been proposed as candidates for nominal anchors is subject to fluctuations that will add an element of unnecessary monetary volatility to a country that has pegged its money to that variable: velocity shocks in the case of M1, supply shocks in the case of inflation targeting, measurement errors in the case of nominal GDP targeting, fluctuations in world gold markets in the case of the gold standard, and fluctuations in the anchor currency in the case of exchange rate pegs.
With inflation targeting, the short- and medium-run targets are the new nominal anchors.
There are other nominal anchors that have been used to try to achieve low inflation--the two most commonly used being monetary aggregate targets and an exchange rate that is fixed to the currency of a country that has had a history of low inflation.
All these forms of explicit nominal anchors can help reduce the time-inconsistency problem, as the success of countries using them in lowering and controlling inflation demonstrates (Mishkin, 1999b).
A number of potential nominal anchors for monetary strategy can serve as targets.