Describe how a nominal anchor can help a central bank achieve credibility.
Answer: An important way to constrain discretion is to commit to a nominal anchor that ties
down the price level or inflation to achieve price stability. If the commitment to a nominal
anchor has credibility, i.e., its believed by the public, it can act as a behaviour rule and will
anchor expectations reducing output fluctuations.
Diff: 2 Type: SA Page Ref: 625
Skill: Recall
Objective List: 26.2 Characterize the discretionary versus nondiscretionary and rules versus
discretion policy debates
