Question

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

Short answer

Nominal anchor helps in keeping inflation expectations low and stable

Step-by-step solution

Concept Introduction  

Monetary policies are macroeconomic policies developed and implemented by the country's central bank. It demonstrates how the Central Bank manages to keep the economy's liquidity stable. The primary goal of any monetary policy is to control inflation and employment.

Explanation

A nominal variable such as the inflation rate that limits the price level in order to maintain price stability is referred to as a nominal anchor. It is a straightforward mechanism for determining the overall price level in the economy.

The nominal anchor helps to keep the nominal variable within a narrow range. This helps in keeping inflation expectations low and stable. A nominal anchor based on quantity only targets the money, whereas a nominal anchor based on price targets an exchange rate or an interest rate.