Why is Canada's Price Level so Predictable?
AbstractOne of the pioneers of inflation targeting (IT), the Bank of Canada is now considering a possibility of switching to price-level-path targeting (PLPT), where past deviations of inflation from the target would have to be offset in the future, bringing the price level back to a predetermined path. This paper draws attention to the fact that the price level in Canada has strayed little from the path implied by the two percent inflation target since its introduction in December 1994, and has tended to revert to that path after temporary deviations. Econometric analysis using Bayesian estimation suggests that a low probability can be assigned to explaining this behavior by sheer luck manifesting itself in mutually offsetting shocks. Much more plausible is the assumption that inflation expectations and interest rates are determined in a way that is consistent with an element of PLPT. This suggests that the difference between IT as it is actually practiced (or perceived) and PLPT may be less stark than what pure theoretical constructs posit, and that the transition to a fullfledged PLPT regime will likely be considerably easier than what was previously thought. The paper also shows that inflation expectations are a major driver of actual inflation in Canada, which makes it easier to keep inflation close to the target without large output costs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 08/25.
Date of creation: 01 Jan 2008
Date of revision:
Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
Other versions of this item:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-CBA-2008-03-01 (Central Banking)
- NEP-MAC-2008-03-01 (Macroeconomics)
- NEP-MON-2008-03-01 (Monetary Economics)
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.:
- Nicoletta Batini & Douglas Laxton, 2007.
"Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 12, pages 467-506
Central Bank of Chile.
- Nicoletta Batini & Douglas Laxton, 2006. "Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets," Working Papers Central Bank of Chile 406, Central Bank of Chile.
- Stephen G. Cecchetti & Junhan Kim, 2003.
"Inflation Targeting, Price-Path Targeting and Output Variability,"
NBER Working Papers
9672, National Bureau of Economic Research, Inc.
- Stephen G. Cecchetti & Kim, 2004. "Inflation Targeting, Price-Path Targeting, and Output Variability," NBER Chapters, in: The Inflation-Targeting Debate, pages 173-200 National Bureau of Economic Research, Inc.
- Benjamin Hunt & Douglas Laxton, 2004.
"The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan,"
National Institute Economic Review,
National Institute of Economic and Social Research, vol. 187(1), pages 76-92, January.
- Douglas Laxton & Ben Hunt, 2001. "The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan," IMF Working Papers 01/186, International Monetary Fund.
- David Longworth, 2002. "Inflation and the Macroeconomy: Changes from the 1980s to the 1990s," Bank of Canada Review, Bank of Canada, vol. 2002(Spring), pages 3-18.
- A. R. Pagan & Douglas Laxton & Luis CatÃ£o, 2008. "Monetary Transmission in an Emerging Targeter," IMF Working Papers 08/191, International Monetary Fund.
- Wolfgang Pollan, 2013. "Inflation Persistence or the Protracted Effects of Commodity Price Changes?," WIFO Working Papers 451, WIFO.
- Angelo Melino, 2011. "Moving Monetary Policy Forward: Why Small Steps - and a Lower Inflation Target - Make Sense for the Bank of Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 319, January.
- Charles Bean & Matthius Paustian & Adrian Penalver & Tim Taylor, 2010. "Monetary policy after the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 267-328.
- Francisco Ruge-Murcia, 2014. "Do Inflation-Targeting Central Banks Implicitly Target the Price Level?," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 301-326, June.
- Clinton, Kevin & Garcia-Saltos, Roberto & Johnson, Marianne & Kamenik, Ondrej & Laxton, Douglas, 2010. "International deflation risks under alternative macroeconomic policies," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 140-177, June.
- 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.
- Eurilton Araújo & Débora Gouveia, 2013. "Calvo-type rules and the forward-looking behavior of inflation targeting central banks," Economics Bulletin, AccessEcon, vol. 33(3), pages 2042-2051.
- RUGE-MURCIA, Francisco J., 2009.
"Do Inflation-Targeting Central Banks Implicitly Target the Price Level?,"
Cahiers de recherche
2009-15, Universite de Montreal, Departement de sciences economiques.
- RUGE-MURCIA, Francisco J., 2009. "Do Inflation-Targeting Central Banks Implicitly Target the Price Level?," Cahiers de recherche 16-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).
If references are entirely missing, you can add them using this form.