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Wicksell at the Bank of Canada

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  • Kevin Clinton

    ()
    (Queen's University)

Abstract

Wicksell, writing around the start of the 20th century, outlined an approach to monetary policy strikingly similar to the modern approach, of which the Bank of Canada has been a pioneer. Its features include: the overriding objective of price stability (or low inflation); an interest rate instrument controlled by the rates on settlement balances at the central bank; and a policy rule under which the instrument varies in response to deviations from the objective. Wicksell’s natural rate of interest has resurfaced as the neutral rate in mainstream macroeconomic models; and his description of the inflation process has parallels in the modern Phillips curve. Moreover, in a mandate for price stability, one can find a logical basis for the independence and accountability of central banks. The paper tries to explain why Wicksell’s ideas fell by the wayside for a century, and describes how the Bank of Canada, by pragmatic steps in the 1990s, helped reinvent Wicksell, and install a neo-Wicksellian monetary policy.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1087.pdf
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1087.

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Length: 22 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:qed:wpaper:1087

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Keywords: Wicksell; central bank; monetary policy; Bank of Canada;

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References

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  1. Thomas M. Humphrey, 1997. "Fisher and Wicksell on the quantity theory," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 71-90.
  2. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  3. Dodge, David, 2002. "Inflation targeting in Canada: Experience and lessons," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 113-124, August.
  4. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  5. David Longworth, 2003. "Money in the Bank (of Canada)," Technical Reports 93, Bank of Canada.
  6. Donna Howard, 1998. "A primer on the implementation of monetary policy in the LVTS environment," Bank of Canada Review, Bank of Canada, vol. 1998(Autumn), pages 57-66.
  7. Blanchard, Olivier J & Galí, Jordi, 2005. "Real Wage Rigidities and the New Keynesian Model," CEPR Discussion Papers 5375, C.E.P.R. Discussion Papers.
  8. Acheson, Keith & Chant, John F, 1973. "Bureaucratic Theory and the Choice of Central Bank Goals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(2), pages 637-55, May.
  9. Laidler, David, 1972. "On Wicksell's Theory of Price Level Dynamics," The Manchester School of Economic & Social Studies, University of Manchester, vol. 40(2), pages 125-44, June.
  10. Charles Freedman, 1996. "What operating procedures should be adopted to maintain price stability? practical issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 241-285.
  11. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  12. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  13. Denise Côté & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2002. "The Role of Simple Rules in the Conduct of Canadian Monetary Policy," Bank of Canada Review, Bank of Canada, vol. 2002(Spring), pages 27-35.
  14. Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, EconWPA, revised 23 Jun 1994.
  15. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
  16. Jamie Armour & Ben Fung & Dinah Maclean, 2002. "Taylor Rules in the Quarterly Projection Model," Working Papers 02-1, Bank of Canada.
  17. Robert E. Lucas, Jr. & N. Gregory Mankiw & Michael Woodford, 2005. "Panel discussion: understanding price determination: where are we now? where should we be going?," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  18. Allan Crawford, 1998. "Measurement biases in the Canadian CPI: An update," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 39-56.
  19. Tiff Macklem, 2001. "A New Measure of Core Inflation," Bank of Canada Review, Bank of Canada, vol. 2001(Autumn), pages 3-12.
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