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The Bank of Canada and Zero Inflation: A New Cross of Gold?

  • R. F. Lucas

What are we to make of the policy announcement by Governor John Crow that the primary objective of the Bank of Canada is to eradicate inflation from the Canadian economy? This paper evaluates the policy both from comparative static and dynamic viewpoints. An analysis of credibility suggests that the Bank is wrong in its belief that a failure to eliminate inflation must necessarily imply that inflation will accelerate. Because the policy appears to be based on a misplaced fear of renewed inflation, and because many of the regional economies are not in a position to weather another fight on inflation, the author concludes that the policy is not appropriate at this time.

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

Volume (Year): 15 (1989)
Issue (Month): 1 (March)
Pages: 84-93

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Handle: RePEc:cpp:issued:v:15:y:1989:i:1:p:84-93
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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  3. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. John McCallum, 1987. "Unemployment in Canada and the United States," Canadian Journal of Economics, Canadian Economics Association, vol. 20(4), pages 802-22, November.
  5. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  8. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
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