IDEAS home Printed from https://ideas.repec.org/a/bca/bcarev/v2000y2000ispring00p11-17.html
   My bibliography  Save this article

Credibility and Monetary Policy

Author

Listed:

Abstract

A highly credible monetary policy helps to reduce the degree of uncertainty that can surround the objectives of such policy. When the monetary policy pursued by the central bank is credible, the expectations of the public are focused on a target. If the public believes that the Bank will act to bring inflation back to the target, then its expectations will not react so strongly to fluctuating price trends. In turn, fluctuations in inflation, interest rates, output, and employment should be less pronounced than in the absence of such credibility. The adoption of inflation control as a monetary policy objective by some countries has led central banks to take steps to enhance the credibility of monetary policy. For the Bank of Canada, these include the publication of our Monetary Policy Report each May and November, with formal updates each February and August the initiation of communications activities across the country the use of the overnight interest rate as a short-term operating target the issuing of a press release each time the Bank changes its key rates. To date, most of the studies on this topic have concluded that success in keeping inflation within a target range has helped to increase the credibility of Canadian monetary policy. These surveys suggest that expected inflation, which stood at about 5 per cent in 1990, declined to around 2 per cent by 1999 (Chart 1, page 15). Indeed, according to these surveys, for the entire period during which the Bank has had a target range for inflation, expected inflation rates have remained within that range. Inflation expectations have also reacted very little to changes in the total CPI, suggesting that the targets have helped to focus expectations on the target rate and have thus enhanced the credibility of monetary policy (Chart 2, page 16). One particular study shows that the life of collective wage agreements in Canada has been increasing and that the number of such agreements containing cost-of-living adjustment (COLA) clauses has steadily declined. The authors of this study suggest that this may reflect the greater credibility of Canadian monetary policy (Table 1, page 16). The proportion of mortgages with five-year terms is now higher than it was in the mid-1980s, and many financial institutions have been offering 7-to 10-year mortgages. This also suggests that inflation targets have gained credibility.

Suggested Citation

  • Patrick Perrier & Robert Amano, 2000. "Credibility and Monetary Policy," Bank of Canada Review, Bank of Canada, vol. 2000(Spring), pages 11-17.
  • Handle: RePEc:bca:bcarev:v:2000:y:2000:i:spring00:p:11-17
    as

    Download full text from publisher

    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/06/r002b-e.pdf
    File Function: full text
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paul Jenkins & Brian O'Reilly, 2001. "Monetary Policy and the Economic Well-being of Canadians," The Review of Economic Performance and Social Progress,in: Andrew Sharpe, Executive Director & France St-Hilaire, Vice-President , Research & Keith Banting, Di (ed.), The Review of Economic Performance and Social Progress 2001: The Longest Decade: Canada in the 1990s, volume 1 Centre for the Study of Living Standards;The Institutute for Research on Public Policy.
    2. Miniaoui, Héla & Smida, Mounir, 2008. "Crédibilité des autorités monétaires et transparence – Quelle complémentarité dans le cas de la Tunisie? Une contribution au débat," L'Actualité Economique, Société Canadienne de Science Economique, vol. 84(2), pages 205-234, juin.
    3. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2009. "Anchors for Inflation Expectations," DNB Working Papers 229, Netherlands Central Bank, Research Department.
    4. Federico Ravenna, 2005. "The European Monetary Union as a Commitment Device for New EU Member States," Working Papers 98, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements.
    6. Malikane, Christopher & Mokoka, Tshepo, 2012. "Monetary policy credibility: A Phillips curve view," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 266-271.
    7. 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.
    8. Virginie Traclet, 2004. "Monetary and Fiscal Policies in Canada: Some Interesting Principles for EMU?," Staff Working Papers 04-28, Bank of Canada.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bcarev:v:2000:y:2000:i:spring00:p:11-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://www.bank-banque-canada.ca/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.