Working Paper: NBER ID: w4850
Authors: Robert Flood; Michael Mussa
Abstract: This paper presents a selective survey of issues relevant to the choice of nominal anchors for monetary policy. Section I reviews long price-level histories for the United Kingdom and United States, which reveal that the price level behaved very differently following WWII in these countries than it had done in previous post-war experiences. In particular following WWII the responsibilities of monetary policy expanded to encompass a business-cycle stabilization role and the nominal anchor shifted from the fixed anchor or price-level stability to the moving anchor of inflation-rate stability. The remaining sections of the paper review, in the context of a variety of models, some of the considerations that are relevant to setting the average inflation rate in countries without a fixed nominal anchor.
Keywords: nominal anchors; monetary policy; inflation targeting; price stability
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed nominal anchor (gold standard) (F33) | price stability (E31) |
| moving nominal anchor (inflation targeting) (E63) | price stability (E31) |
| fixed nominal anchor (gold standard) (F33) | inflation rate (E31) |
| moving nominal anchor (inflation targeting) (E63) | inflation rate (E31) |
| shift from fixed nominal anchor to moving nominal anchor (F31) | stability of the real economy (E32) |