Choosing the best monetary policy framework for Canada..

Canada is undergoing a review of its monetary policy framework:

In 2021, the Bank of Canada and the Government of Canada will renew their agreement on Canada’s inflation-control target. First signed in 1991, the agreement is renewed every five years and provides a vital touchpoint around which to frame the Bank’s broader ongoing research into issues related to monetary policy frameworks. 

Nice speech by Carolyn Wilkins, DG of Bank of Canada who reviews the various frameworks:

Having a formal agreement with a democratically elected government supports the credibility of our shared objective. It gives the Bank the independence it
needs to pursue that objective. The Bank has used this independence wisely. We have delivered low and stable inflation—pretty darn close to our target of 2 per  cent on average over the last 25 years. We have managed to do this even in the face of big economic shocks, such as the run-up of oil prices in the mid-2000s and the plunge four years ago, and the global financial crisis in between.

Yet even a well-functioning monetary policy framework deserves an openminded discussion, particularly in the post-crisis world we live in. There are a
couple of challenges facing our framework that mean it may not serve the economic and financial welfare of Canada in the future as well as it has in the
past.

This is important. The objectives that we set and how we go about achieving them have real implications for people in their everyday lives. This could not be
more obvious than it is today, as interest rates rise to more normal levels. This is resulting in difficult adjustments in the finances of many. At the same time, the Bank’s actions are supporting a stable economic environment for even more households.

My remarks today are intended to spark a good discussion. I will focus on two  public policy questions that are shaping our work plan leading up to the 2021
renewal:
1. What alternative frameworks might do a better job than inflation targeting, if any? We know there are contenders, but we have not conducted a full horse race since the 1980s. 
2. Regardless of whether we stick with inflation targeting or move to something new, what supporting policies can we bring to the table? We
know the Bank of Canada’s policy toolkit, along with other  public policies, are critical to reinforcing our shared objectives.

She discusses main challenges to IT:

One challenge is that the central bank is more likely to run out of conventional firepower in the event of an economic downturn. By that I mean the ability to
lower the policy rate

A second challenge is that the lower neutral rate may encourage households and investors to take on excessive risk.

What are the alternatives?

  • Price level targeting
  • NGDP targeting
  • Including employment in the mandate

Whichever the framework, it should be based on these objectives:

  • First, the framework needs to focus only on objectives that monetary policy can actually achieve
  • Second, the framework needs to support the well-being of Canadians—what I like to call the greater good.
  • Third, the framework should serve Canadians well in both good times and bad.

Hmm.

Nice bit with lots of references…

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