However, systematic exchange market interventions, particularly sterilized ones, are likely to be counterproductive as they would make it very difficult to signal that the inflation targets, rather than the exchange rate, is the primary nominal anchor
of the economy.
The inflation target is the nominal anchor
for the Norwegian economy.
Following a strong recovery in real wages, progress in disinflation slowed, and the sustained use of the exchange rate as a nominal anchor
widened the current account deficit.
First, a fixed exchange rate provides a nominal anchor
for the price level.
The Norwegian economy was lacking a nominal anchor
during the period of low interest rates and devaluations in the 1970s and 1980s.
In addition, the resulting costs can also be reduced by developing a suitable nominal anchor
(to signal the central banker's ability to precommit).
Monetary policy has no operational nominal anchor
, although the Bank of Turkey has recently announced that inflation will not be allowed to rise above 80 per cent.
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.