In: Economics
Comment on the ability of a credible nominal anchor to allow policy makers to exploit a short-run trade-off between unemployment and inflation.
Answered:-
There are two possible anchors used the by the government as
signals for showing their committment towards a reform in economic
policies. Policy-makers who have a strong commitment and are more
willing to bring some reforms in the country, would opt for more
visible policies that are made credible using an exchange-rate
anchor. In contrast there can be policy-makers who are not careful
enough and would not like to carry through with serious reform.
These would then opt for noisier signals that include a money
anchor.
Now we know that there can be short run tradeoff between
unemployment and inflation where expansionary policies reduce
unemployment and increase inflation. It then depends on how
committed the government is to use these nominal anchors wisely. An
increased visibility makes it easier for the public to seek and
explore the true nature and spirit of the policies of the
government. Policy-maker that are truly committed for bringing out
reforms also want this to happen quickly.