The Canadian Experience with Targets for Inflation Control
This article reflects on Canada's experience with inflation targeting in the 1990s. The discussion opens with a synopsis of the evolution of inflation targets against a backdrop of other monetary policy approaches. The author then proceeds to outline the main advantages of explicit inflation targets - advantages that go beyond the well-known benefits of low inflation. Increased transparency and accountability, and an improvement in the Bank's internal decision making, are highlighted in particular. It is also argued that inflation targets provide a useful mechanism for dealing with demand and supply shocks in a way that reduces disruptive fluctuations. The major criticisms of targeting low rates of inflation (related to wage rigidity, a zero floor on nominal interest rates, and concerns about deflation) are also examined. Although it is too early for definitive conclusions, the author's view is that inflation targets lead to better policy decisions, better economic performance over time, and greater accountability for autonomous central banks.
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Volume (Year): 24 (1998)
Issue (Month): 4 (December)
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References listed on IDEAS
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- Miguel A Savastano & Paul R Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
- Charles Freedman & Tiff Macklem, 1998. "A Comment on "The Great Canadian Slump"," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 646-665, August.
- Frederic S. Mishkin & Adam S. Posen, 1997.
"Inflation targeting: lessons from four countries,"
Economic Policy Review,
Federal Reserve Bank of New York, issue Aug, pages 9-110.
- George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
- Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
- Ben S. Bernanke & Frederic S. Mishkin, 1997.
"Inflation Targeting: A New Framework for Monetary Policy?,"
Journal of Economic Perspectives,
American Economic Association, vol. 11(2), pages 97-116, Spring.
- Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
- Gordon Thiessen, 1995. "Uncertainty and the transmission of monetary policy in Canada (HERMES-Glendon Lecture) [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Summer), pages 41-58.
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