The Role of a Nominal Anchor

In recent years a growing consensus has emerged for price stability as the overriding, long-run goal of monetary policy. However, despite this consensus, the following question still remains: how should monetary policy be conducted to achieve the price stability goal? To shed light on this question, this paper examines the experience with different monetary policy regimes currently in use in a number of countries. A central feature of all of the monetary regimes discussed here is the use of a nominal anchor in some form, so first we will examine what role a nominal anchor plays in promoting price stability. Then we will examine four basic types of monetary policy regimes: 1) exchange-rate targeting, 2) monetary targeting, 3) inflation targeting, and 4) monetary policy with an implicit but not an explicit nominal anchor. The paper then concludes with an overall assessment of the different monetary regimes and draws some policy conclusions. The basic theme that comes out of this analysis is that the success of different monetary regimes depends on their ability to constrain discretionary policymaking so that long-run price stability is more likely to result.