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The Bank of Canada’s “Horse Race” of Alternative Monetary Policy Frameworks: Some Interim Results from Model Simulations

Author

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  • José Dorich
  • Rhys R. Mendes
  • Yang Zhang

Abstract

Since 1991, the Bank of Canada has had an inflation-targeting (IT) framework established by a joint agreement between the Bank and the Government of Canada. The framework is reviewed every five years as part of the process for renewing the inflation-control agreement. This discussion paper summarizes some interim results from Bank staff analysis done for the August 2020 workshop, “Towards the 2021 Renewal of the Bank of Canada’s Monetary Policy Framework.” The Bank will publish updated analysis later in 2021. The core of the current framework—the 2 percent inflation target—has remained unchanged since 1995. This fact reflects its success. Well-anchored inflation expectations contribute to macroeconomic stability while leaving monetary policy with greater flexibility. The 2021 renewal highlights two key challenges facing Canadian monetary policy: (1) the low neutral rate of interest; and (2) the low interest rates associated with a low neutral rate that may encourage excessive risk-taking and debt accumulation To address these challenges, Bank staff are running a “horse race” of alternative monetary policy frameworks (i.e., alternatives to the 2 percent IT framework). Their work evaluates these alternatives using a broad range of qualitative and quantitative criteria and focuses on the macroeconomic performance of the alternative frameworks. The interim results we report in this discussion paper suggest overall that no framework dominates on all margins. As a result, the ranking depends on the relative weight placed on different criteria.

Suggested Citation

  • José Dorich & Rhys R. Mendes & Yang Zhang, 2021. "The Bank of Canada’s “Horse Race” of Alternative Monetary Policy Frameworks: Some Interim Results from Model Simulations," Discussion Papers 2021-13, Bank of Canada.
    • Handle: RePEc:bca:bocadp:21-13
    DOI: 10.34989/sdp-2021-13
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    References listed on IDEAS

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    Cited by:

    1. Joel Wagner & Tudor Schlanger & Yang Zhang, 2022. "A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality," Discussion Papers 2022-4, Bank of Canada.
    2. Vivian Chu & Yang Zhang, 2022. "Harnessing the benefit of state-contingent forward guidance," Staff Analytical Notes 2022-13, Bank of Canada.
    3. Cars Hommes & Mario He & Sebastian Poledna & Melissa Siqueira & Yang Zhang, 2022. "CANVAS: A Canadian Behavioral Agent-Based Model," Staff Working Papers 22-51, Bank of Canada.
    4. Dąbrowski, Marek A. & Janus, Jakub & Mucha, Krystian, 2025. "Shades of inflation targeting: insights from fractional integration," Macroeconomic Dynamics, Cambridge University Press, vol. 29, pages 1-1, January.

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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