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Nominal anchor

Updated: Aug 20, 2021

A mechanism for determining the general price level in an economy. The need for equilibrium in markets for goods and factor services determines the structure of relative prices, but this could be achieved with any absolute price level. The monetary authorities may simply proclaim an intention to keep some price index stable, but this promise may lack credibility. A nominal anchor is a way of making such promises credible. Possible methods include using a commodity such as gold or silver as money, or adopting a fixed exchange rate with some other currency, such as the US dollar, which already has a reputation for price stability.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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