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

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  • R. F. Lucas

Abstract

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.

Suggested Citation

  • R. F. Lucas, 1989. "The Bank of Canada and Zero Inflation: A New Cross of Gold?," Canadian Public Policy, University of Toronto Press, vol. 15(1), pages 84-93, March.
    • Handle: RePEc:cpp:issued:v:15:y:1989:i:1:p:84-93
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    References listed on IDEAS

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    1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
    2. 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.
    3. John McCallum, 1987. "Unemployment in Canada and the United States," Canadian Journal of Economics, Canadian Economics Association, vol. 20(4), pages 802-822, November.
    4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    6. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
    7. 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 473-491, June.
    8. 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.
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    Cited by:

    1. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
    2. repec:nrb:journl:v:22:y:2010:p:4 is not listed on IDEAS
    3. Freedman, Charles, 1990. "La politique monétaire des années 90 : leçons et enjeux," L'Actualité Economique, Société Canadienne de Science Economique, vol. 66(2), pages 147-186, juin.
    4. T.P. Koirala Ph.D, 2010. "Welfare Costs of Inflation in Nepal: An Empirical Analysis," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 22, pages 57-68, April.
    5. Macdonald, Martha, 1995. "Economic restructuring and gender in Canada: Feminist policy initiatives," World Development, Elsevier, vol. 23(11), pages 2005-2017, November.

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