{
  "title": "Bad Dreams Under Alternative Anchors: Are the Consequences Different?",
  "publication": "IMF Working Papers, January 1, 2000",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/bad-dreams-under-alternative-anchors-are-the-consequences-different-3423",
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  "summary": "Using a simple model, this paper shows how a strict monetary rule exhibits characteristics similar to those of an exchange rate anchor, in terms of a lack of robustness in the presence of adverse expectations (“bad dreams”).",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Using a simple model, the paper shows how a strict monetary rule exhibits characteristics similar to those of an exchange rate anchor, in terms of a lack of robustness in the presence of adverse expectations (“bad dreams”).\n- An anticipated devaluation under an exchange rate rule leads to contractionary effects.\n- An anticipated increase in the money stock under a monetary rule, though initially expansionary, becomes contractionary when these expectations are not validated.\n- The evidence suggests that much of the criticism of an exchange rate anchor implicitly considers not another rule but rather, discretion as the alternative."
    },
    {
      "heading": "Key findings",
      "content": "- Strict monetary rules can mimic the vulnerabilities of exchange rate anchors when agents form adverse expectations.\n- Anticipated policy actions can have reversed effects if expectations are disappointed:\n  - Anticipated devaluation (exchange rate rule) → contractionary effects.\n  - Anticipated increase in money stock (monetary rule) → initially expansionary but becomes contractionary if not realized.\n- The paper emphasizes the role of expectations in determining the real effects of alternative nominal anchors."
    },
    {
      "heading": "Policy implications",
      "content": "- Policymakers should account for expectation-driven channels when choosing between exchange rate anchors and strict monetary rules.\n- Critiques of exchange rate anchors should clarify whether the intended alternative is another rule (e.g., a monetary rule) or discretionary policy, since outcomes differ when discretion is the implicit comparator.\n- Robustness to adverse expectations is a key criterion in assessing nominal anchors."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Exchange rate adjustments, Exchange rates, Financial services, Foreign exchange, Monetary base, Money, Real exchange rates, Real interest rates\n- Keywords: money stock, real interest rate, WP\n\n---\n\n Content in this bundle\n\n- Bad Dreams Under Alternative Anchors: Are the Consequences Different? - WP/00/20\n  - Bad Dreams Under Alternative Anchors: Are the Consequences Different? - WP/00/20 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Bad Dreams Under Alternative Anchors: Are the Consequences Different? - WP/00/20 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/bad-dreams-under-alternative-anchors-are-the-consequences-different-3423"
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    "Authors: Leonardo Auernheimer, Susan M George",
    "Published: January 1, 2000",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451843835.001",
    "Using a simple model, the paper shows how a strict monetary rule exhibits characteristics similar to those of an exchange rate anchor, in terms of a lack of robustness in the presence of adverse expectations (“bad dreams”).",
    "An anticipated devaluation under an exchange rate rule leads to contractionary effects.",
    "An anticipated increase in the money stock under a monetary rule, though initially expansionary, becomes contractionary when these expectations are not validated.",
    "The evidence suggests that much of the criticism of an exchange rate anchor implicitly considers not another rule but rather, discretion as the alternative.",
    "Strict monetary rules can mimic the vulnerabilities of exchange rate anchors when agents form adverse expectations.",
    "Anticipated policy actions can have reversed effects if expectations are disappointed:",
    "The paper emphasizes the role of expectations in determining the real effects of alternative nominal anchors.",
    "Policymakers should account for expectation-driven channels when choosing between exchange rate anchors and strict monetary rules.",
    "Critiques of exchange rate anchors should clarify whether the intended alternative is another rule (e.g., a monetary rule) or discretionary policy, since outcomes differ when discretion is the implicit comparator.",
    "Robustness to adverse expectations is a key criterion in assessing nominal anchors.",
    "Subjects: Exchange rate adjustments, Exchange rates, Financial services, Foreign exchange, Monetary base, Money, Real exchange rates, Real interest rates",
    "Keywords: money stock, real interest rate, WP",
    "**Bad Dreams Under Alternative Anchors: Are the Consequences Different? - WP/00/20**"
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