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Chapter 17: Q.1 (page 468)

1. What are the benefits of using a nominal anchor for the conduct of monetary policy?

Short Answer

Expert verified

The benefits of using a nominal anchor for the conduct of monetary policy are,

  • A nominal anchor helps boost price solidity
  • It can furthermore restrict the time-inconsistency issue

Step by step solution

01

Concept introduction

A nominal anchor is an unstable policymaker that can operate to tie down the price level. One nominal anchor central banks operated in history was a currency peg鈥攚hich connected the value of the domestic currency to the value of the currency of a low-inflation nation

02

Explanation

A nominal anchor helps boost price solidity by connecting inflation anticipations to lower statuses straight via its discretion on the worth of money.

It can furthermore restrict the time-inconsistency issue by supplying an anticipated constraint on monetary policy.

03

Final answer

The benefits of using a nominal anchor for the conduct of monetary policy are,

  • A nominal anchor helps boost price solidity
  • It can furthermore restrict the time-inconsistency issue

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Most popular questions from this chapter

What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?

a. Unemployment rises due to a recession.

b. An oil price shock causes the inflation rate to rise by 1%and output to fall by 1%.

c. The economy experiences prolonged increases in productivity growth while actual output growth is unchanged.

d. Potential output declines while actual output remains unchanged.

e. The Fed revises its (implicit) inflation target downward.

f. The equilibrium real fed funds rate decreases

鈥淭he zero lower bound on short-term interest rates is not a problem, since the central bank can just use quantitative easing to lower intermediate and longer-term interest rates instead.鈥� Is this statement true, false, or uncertain? Explain.

How does inflation targeting help reduce the time inconsistency problem of discretionary policy.

Why might macroprudential regulation be more effective in managing asset-price bubbles than monetary policy ?

What are the key advantages and disadvantages of the monetary strategy used by the Federal Reserve under Alan Greenspan, in which the nominal anchor was implicit rather than explicit?
See all solutions

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