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The Canadian Experience with Targets for Inflation Control

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  • Gordon G. Thiessen
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    Abstract

    This article reflects on Canada's experience with inflation targeting in the 1990s. The discussion opens with a synopsis of the evolution of inflation targets against a backdrop of other monetary policy approaches. The author then proceeds to outline the main advantages of explicit inflation targets - advantages that go beyond the well-known benefits of low inflation. Increased transparency and accountability, and an improvement in the Bank's internal decision making, are highlighted in particular. It is also argued that inflation targets provide a useful mechanism for dealing with demand and supply shocks in a way that reduces disruptive fluctuations. The major criticisms of targeting low rates of inflation (related to wage rigidity, a zero floor on nominal interest rates, and concerns about deflation) are also examined. Although it is too early for definitive conclusions, the author's view is that inflation targets lead to better policy decisions, better economic performance over time, and greater accountability for autonomous central banks.

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    Bibliographic Info

    Article provided by University of Toronto Press in its journal Canadian Public Policy.

    Volume (Year): 24 (1998)
    Issue (Month): 4 (December)
    Pages: 415-428

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    Handle: RePEc:cpp:issued:v:24:y:1998:i:4:p:415-428

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
    2. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    3. Gordon Thiessen, 1995. "Uncertainty and the transmission of monetary policy in Canada (HERMES-Glendon Lecture) [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Summer), pages 41-58.
    4. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
    5. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    6. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
    7. Charles Freedman & Tiff Macklem, 1998. "A Comment on "The Great Canadian Slump"," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 646-665, August.
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    Cited by:
    1. Aaron Drew, 2001. "Lessons from Inflation Targeting in New Zealand," Working Papers Central Bank of Chile 113, Central Bank of Chile.
    2. Buiter, Willem H, 1999. "The EMU and the NAMU: What is the Case for North American Monetary Union?," CEPR Discussion Papers 2181, C.E.P.R. Discussion Papers.
    3. William B.P. Robson, 2009. "To the Next Level: From Gold Standard to Inflation Targets - to Price Stability?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 285, March.
    4. Alina Carare & Mark R. Stone, 2003. "Inflation Targeting Regimes," IMF Working Papers 03/9, International Monetary Fund.
    5. Pierre L. Siklos, 2003. "Assessing the Impact of Changes in Transparency and Accountability at the Bank of Canada," Canadian Public Policy, University of Toronto Press, vol. 29(3), pages 279-299, September.

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