Additionally, Directors concurred that "the peg to a basket remains appropriate for the Kuwaiti economy, as it continues to provide an effective nominal anchor
," noting that recommended fiscal adjustment "would largely close the moderate current account gap over the medium term.
The US dollar exchange rate pegs remain appropriate for their economies, providing a nominal anchor
Directors underscored that a modernization of monetary policy management, including greater exchange rate flexibility and a gradual shift to using inflation as the nominal anchor
, will enhance resilience to external shocks.
In particular, raising tire inflation target damages the value of inflation targeting as a nominal anchor
That said, the peg has provided a stable nominal anchor
for the economy, particularly as contracts for oil, the main export, are typically priced in dollars.
The dollar peg has served the GCC well for decades by providing a nominal anchor
to the economy and expectations, in our view.
The pegs are the key and really the only nominal anchor
in these economies and the pegs are backed by huge reserves," Gamble said at a briefing.
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.
Gemayel reasons that the central bank should have acted differently when it had a chance to modify the currency peg from one with the US dollar as nominal anchor
to one tied to a basket of currencies.
On the monetary policy front, Rajan made a fundamental shift by proclaiming the consumer price index (CPI) as the nominal anchor
, instead of the wholesale price index (WPI).
Key features in the short-term interest rates responsiveness pattern in the countries with flexible exchange rate arrangements seem to be similar to those of countries with exchange rate nominal anchor
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.