Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
A nominal anchor is a nominal variable that is the target for monetary policy. In this paper the authors distinguish three types of such anchors. First, when monetary policy fixes the currency price of a commodity or a group of commodities they refer to such an anchor as a fixed nominal anchor, with the gold standard as a famous example. Second, and more generally, when monetary policy targets the growth of a nominal magnitude--such as the price level, a monetary aggregate or nominal income--building on an inherited past, such an anchor is referred to as a moving nominal anchor. The third arrangement, which is not completely distinct from the previous two, aims at fixing or managing the price of one or more countries’ currencies in terms of another country’s currency. Countries entering into such a system agree to share a more basic nominal anchor, one in which the inflation target of one country and the nominal system of that country inherit properties of the underlying nominal anchor.
Before the Great Depression and the Second World War, many countries adhered to a commodity standard, on and off, with the gold/silver standard the best-known example. During this period countries following such a standard experienced long-run price stability; inflations, which accompanied wars, were followed by equivalent deflations after the wars. In the period following the Great Depression and the Second World War monetary policy was often given a more activist role and was expected to help stabilize the real economy as well as to deliver a politically tolerable inflation performance.
Much attention in recent years has been directed toward: (1) the appropriate design of monetary policy using theoretical arguments and data-based simulations; (2) the role of monetary policy rules; and (3) the ability of the private sector to exploit certain monetary policy rules. The paper reviews selected aspects of this literature, drawing out features that may be robust across industrial countries and possibly important for their average inflation-rate choice.
Finally, it should be emphasized that in the actual conduct of monetary policy, governments and central banks do not generally behave in a manner that can be summarized easily in a mathematical equation. Almost always, some degree of judgment is exercised by a country’s monetary authority. Nevertheless, the conduct of monetary policy is not random and undisciplined; it is governed by reasonably well-defined objectives, in the context of a broad understanding of how monetary policy affects the real economy, the financial system, and the price level. In the end, it is the fact that there is something systematic about the conduct of monetary policy, and about its effects, that allows economic analysis to shed some light, at least potentially, on the effects of alternative monetary policies in supplying a nominal anchor for the economic system. The practical importance and implications of any such analytical exercise, of course, need to be interpreted with an appropriate degree of caution.