Having an independent monetary policy is of course the first order of business. This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency. In general, the central banks in many developing countries have poor records in managing monetary policy. For this and other reasons, developing countries that want to establish credible monetary policy may institute a currency board or adopt Beginning with New Zealand in 1990, central banks began adopting formal, public There continues to be some debate about whether monetary policy can (or should) smooth Conventional macroeconomic models assume that all agents in an economy are fully rational.

During the crisis, many inflation-anchoring countries reached the lower bound of zero rates, resulting in inflation rates decreasing to almost zero or even deflation.The anchors discussed in this article suggest that keeping inflation at the desired level is feasible by setting a target interest rate, money supply growth rate, price level, or rate of depreciation.

The correct option is (a) - A nation may not pursue an independent monetary policy.

Countries may decide to use a fixed exchange rate monetary regime in order to take advantage of price stability and control inflation. EndNote where π is the inflation rate, μ is the money supply growth rate and g is the real output growth rate. Expansionary policy is a macroeconomic policy that seeks to boost aggregate demand to stimulate economic growth. RefWorks

The independence of the ECB consists of five main pillars which are reflected in the Statute of the European System of Central Banks and the Treaty on … Monetary policy analyses should thus account for the fact that policymakers (or central bankers) are individuals and prone to biases and temptations that can sensibly influence their ultimate choices in the setting of macroeconomic and/or interest rate targets.Bordo, Michael D., 2008. Don’t take the Bank of England’s optimistic economic forecasts at face value. The impossible trinity (also known as the trilemma) is a concept in international economics which states that it is impossible to have all three of the following at the same time: However, targeting the money supply growth rate is considered a weak policy, because it is not stably related to the real output growth, As a result, a higher output growth rate will result in a too low level of inflation. But even with a seemingly independent central bank, a central bank whose hands are not tied to the anti-inflation policy might be deemed as not fully credible; in this case there is an advantage to be had by the central bank being in some way bound to follow through on its policy pronouncements, lending it credibility.

Papers Following the collapse of Bretton Woods, nominal anchoring has grown in importance for monetary policy makers and inflation reduction. These include white papers, government data, original reporting, and interviews with industry experts. The matter is further complicated by the difficulties in forecasting money demand and fiscal pressure to levy the inflation tax by expanding the base rapidly. The latter regimes would have to implement an exchange rate target to influence their inflation, as none of the other instruments are available to them. The gold standard might be regarded as a special case of "fixed exchange rate" policy, or as a special type of commodity price level targeting. Monetary policy is policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often as an attempt to reduce inflation or the interest rate to ensure price stability and general trust of the value and stability of the nation's currency.

Papers In the US this approach to monetary policy was discontinued with the selection of Central banks might choose to set a money supply growth target as a nominal anchor to keep prices stable in the long term. Typically the duration that the interest rate target is kept constant will vary between months and years. (Guildford: University of Surrey Press). For this and other reasons, developing countries that want to establish credible monetary policy may institute a currency board or adopt Beginning with New Zealand in 1990, central banks began adopting formal, public There continues to be some debate about whether monetary policy can (or should) smooth Conventional macroeconomic models assume that all agents in an economy are fully rational.

This, in turn, requires that the central bank abandon their monetary policy autonomy in the long run. Moreover, the ability to conduct credit policy is inessential to the Fed’s core monetary policy mission and can potentially contribute to finan-cial instability (Haltom and Lacker 2014). But even with a seemingly independent central bank, a central bank whose hands are not tied to the anti-inflation policy might be deemed as not fully credible; in this case there is an advantage to be had by the central bank being in some way bound to follow through on its policy pronouncements, lending it credibility. Monetary regimes combine long-run nominal anchoring with flexibility in the short run.

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