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Nominal Anchor: Economic and Statistical Aspects

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  • Emanuel Barnea

    (Bank of Israel)

  • Nissan Liviatan

    (Hebrew University, Bank of Israel)

Abstract

In this paper we give a concrete meaning to the concept of a nominal anchor, based on the Israeli inflationary experience. The lack of a nominal anchor in the inflationary era is related to the aversion of the policymakers to changes in inflation, without regard to the absolute level of the inflation plateau. The incentive to use surprise-inflation tactics in this environment, led to an acceleration of inflation. This contrasts with the early period of the 1950's and 1960's where the Bretton-Woods system provided a nominal anchor and hence a concern with the level of inflation. A similar attitude prevailed after the 1985 stabilization, particularly since Israel adopted the inflation target regime. We test this hypothesis by relating the lack of a nominal anchor in the inflationary era to a random walk (unit root) process in the inflation series. This hypothesis should be rejected in the stable inflation periods. The results confirm these implications.

Suggested Citation

  • Emanuel Barnea & Nissan Liviatan, 2006. "Nominal Anchor: Economic and Statistical Aspects," Bank of Israel Working Papers 2006.01, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2006.01
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    References listed on IDEAS

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