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The Costs of Inflexible Indexing: Avoiding the Adverse Fiscal Impacts of Lower Inflation

Author

Listed:
  • Philippe Bergevin

    (C.D. Howe Institute)

  • William B.P. Robson

    (C.D. Howe Institute)

Abstract

A lively debate is underway about replacing Canada’s 2 percent inflation target with a target for lower inflation or a target for the price level itself when Canada’s inflation-control arrangement expires at the end of 2011. Either change could reduce uncertainty about changes in the value of money over time, and potentially stabilize the economy as well. But such policies may involve costs; a long-standing concern is that rises versus falls in the price level may have different or asymmetrical impacts on the economy.

Suggested Citation

  • Philippe Bergevin & William B.P. Robson, 2011. "The Costs of Inflexible Indexing: Avoiding the Adverse Fiscal Impacts of Lower Inflation," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 322, February.
  • Handle: RePEc:cdh:commen:322
    as

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    File URL: https://www.cdhowe.org/public-policy-research/costs-inflexible-indexing-avoiding-adverse-fiscal-impacts-lower-inflation
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    References listed on IDEAS

    as
    1. Pierre Siklos & Andrew Spence, 2010. "Faceoff: Should the Bank of Canada Release its Projections of the Interest Rate Path? – The Cases For and Against," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 134, October.
    2. Allan Crawford, 1998. "Measurement biases in the Canadian CPI: An update," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 39-56.
    3. David Longworth, 2010. "Warding Off Financial Market Failure: How to Avoid Squeezed Margins and Bad Haircuts," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 135, December.
    4. Steve Ambler, 2009. "Price-Level Targeting and Stabilization Policy: A Review," Bank of Canada Review, Bank of Canada, vol. 2009(Spring), pages 21-31.
    5. Colin Busby & William B.P. Robson, 2010. "Disarmed and Disadvantaged: Canada’s Workers Need More Physical Capital to Confront the Productivity Challenge," e-briefs 107, C.D. Howe Institute.
    6. Philippe Bergevin & David Laidler, 2010. "Putting Money Back into Monetary Policy: A Monetary Anchor for Price and Financial Stability," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 312, October.
    7. Pierre Fortin & George A. Akerlof & William T. Dickens & George L. Perry, 2002. "Inflation and Unemployment in the U.S. and Canada: A Common Framework," Cahiers de recherche du Département des sciences économiques, UQAM 20-16, Université du Québec à Montréal, Département des sciences économiques.
    8. Michael Parkin, 2009. "What is the Ideal Monetary Policy Regime? Improving the Bank of Canada's Inflation-targeting Program," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 279, January.
    9. 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.
    10. Jotham Peters & Chris Bataille & Nic Rivers & Mark Jaccard, 2010. "Taxing Emissions, Not Income: How to Moderate the Regional Impact of Federal Environment Policy," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 314, November.
    11. Alexandre Laurin & William B.P. Robson, 2011. "A Faster Track to Fiscal Balance: The 2011 Shadow Budget," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 320, February.
    12. John Richards, 2011. "School Dropouts: Who Are They and What Can Be Done?," e-briefs 109, C.D. Howe Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Steve E. Hrudey, 2011. "Safe Drinking Water Policy for Canada - Turning Hindsight into Foresight," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 323, February.
    2. Colin Busby & William B.P. Robson, 2011. "A Social Insurance Model for Pharmacare: Ontario's Options for a More Sustainable, Cost-Effective Drug Program," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 326, April.
    3. Bev Dahlby & Ergete Ferede, 2011. "What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 324, March.
    4. David A. Dodge & Richard Dion, 2011. "Chronic Healthcare Spending Disease: A Macro Diagnosis and Prognosis," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 327, April.
    5. Pierre Fortin, 2011. "Staying the Course: Quebec's Fiscal Balance Challenge," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 325, March.
    6. John Richards, 2011. "Aboriginal Education in Quebec: A Benchmarking Exercise," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 328, April.

    More about this item

    Keywords

    monetary policy; Consumer Price Index (CPI); Bank of Canada; inflation control;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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