Bank of Canada’s five year agreement with government to target inflation was to end this year. There were talks of whether BoC needs to adopt a new framework or make changes in the existing framework.
Recently, the govt. announced it plans to maintain status quo and let BoC target inflation at 2%. Christopher Ragan of CD Howe says it was a job well done.
- Sticking with the status quo was only one option under debate among monetary experts in the lead-up to renewal of the Bank of Canada’s inflation-targeting mandate, which was announced by Finance Minister Jim Flaherty this week.
- Several other routes were available. Two of them – namely, targeting nominal GDP or targeting full employment – were arguably non-starters. Two other approaches, however, held more promise: (i) moving to a price-level targeting regime, or (ii) sticking with inflation targeting but with a lower, say 1 percent, target.
- Nevertheless, the renewal of the status quo keeps in place a coherent monetary policy regime that has served Canadians well.
He looks at all these alternative approaches:
- Targeting Nominal GDP – This was not going to be useful as NGDP = Real GDP + inflation. This will lead to higher volatility in inflation as one could target NGDP with both RGDP and inflation. Higher volatility in inflation leads to unanchoring of inflation expectations.
- Targeting Full Employment: Central banks have never been good at this. They realise mon pol only good at anchoring inflation
- Price-Level Targeting: THis means targeting the Price Index. So instead of 2% inflation you say target is 102 CPI index which is at 100 now. More popular of all three and more effective as well as helps recoups missed targets. Problem is communication with the public. Inflation target far more easier to explain
- Moving to a Lower Inflation Target: Not sure moving to 1% will help. This could be seen over a period of time whether 1% inflation will help or not.
Nice stuff on central banking. It is useful to engage in such debates as helps clarify things. Scott Sumner needs to explain NGDP thing to Canadians who have been more flexible to ideas than US counterparts…
