IDEAS home Printed from https://ideas.repec.org/p/lvl/lacicr/1604.html
   My bibliography  Save this paper

A Stable 4% Inflation Could Get Canadians One Half Million More Jobs

Author

Listed:
  • Pierre Fortin

Abstract

The Inflation-Control Agreement between the Government and the Bank of Canada is reviewed and renewed every five years. In this paper, I propose that the upcoming 2016 agreement increase the inflation target by 2 percentage points, from the current 2% to 4%. I first note that the room to stimulate economic activity and employment when the Bank of Canada judges that it is needed has narrowed dangerously in the past 25 years. I argue that the only fully effective means of freeing the Bank from the operational straightjacket into which it has fallen is setting the inflation target at 4% instead of 2%. I then report of evidence that the strong resistance of Canadian employers and employees to money wage cuts generates a significant permanent trade-off between inflation and unemployment at the macro level when inflation is less than 5%. Combining these two strands of observations, I conclude that moving to 4% inflation would generate about one half million more permanent jobs for Canadians and, over time, add some $50 billion per year to domestic income.

Suggested Citation

  • Pierre Fortin, 2016. "A Stable 4% Inflation Could Get Canadians One Half Million More Jobs," Cahiers de recherche 1604, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1604
    as

    Download full text from publisher

    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2016/CIRPEE16-04.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Mario Fortin & Pierre Fortin, 1999. "The Changing Labour Force Participation of Canadians, 1969-96: Evidence from a Panel of Six Demographic Groups," A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999),in: Andrew Sharpe & Louis Grignon (ed.), A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), pages 12-24 Centre for the Study of Living Standards.
    2. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    3. Saten Kumar & Hassan Afrouzi & Olivier Coibion & Yuriy Gorodnichenko, 2015. "Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 151-225.
    4. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-352, May.
    5. Lise Pichette & Pierre St-Amant & Ben Tomlin & Karine Anoma, 2015. "Measuring Potential Output at the Bank of Canada: The Extended Multivariate Filter and the Integrated Framework," Discussion Papers 15-1, Bank of Canada.
    6. Fortin, Pierre & Keil, Manfred & Symons, James, 2001. "The Sources of Unemployment in Canada, 1967-91: Evidence from a Panel of Regions and Demographic Groups," Oxford Economic Papers, Oxford University Press, vol. 53(1), pages 67-93, January.
    7. Robert E. Hall, 2011. "The Long Slump," American Economic Review, American Economic Association, vol. 101(2), pages 431-469, April.
    8. Rose Cunningham & Brigitte Desroches & Eric Santor, 2010. "Inflation Expectations and the Conduct of Monetary Policy: A Review of Recent Evidence and Experience," Bank of Canada Review, Bank of Canada, vol. 2010(Spring), pages 13-25.
    9. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1371-1406.
    10. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
    11. Jonathan Witmer & Jing Yang, 2016. "Estimating Canada’s Effective Lower Bound," Bank of Canada Review, Bank of Canada, vol. 2016(Spring), pages 3-14.
    12. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "Recovery from Financial Crises: Evidence from 100 Episodes," American Economic Review, American Economic Association, vol. 104(5), pages 50-55, May.
    13. Rhys R. Mendes, 2014. "The Neutral Rate of Interest in Canada," Discussion Papers 14-5, Bank of Canada.
    14. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    15. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    16. Rachel, Lukasz & Smith, Thomas, 2015. "Secular drivers of the global real interest rate," Bank of England working papers 571, Bank of England.
    17. Pierre Fortin & Manfred Keil & James Symons, 1995. "The Sources of Unemployment in Canada, 1967-1991: Evidence from a Panel of Regions and Demographic Groups," Cahiers de recherche CREFE / CREFE Working Papers 36, CREFE, Université du Québec à Montréal.
    18. Janet L. Yellen & George A. Akerlof, 2006. "Stabilization Policy: A Reconsideration," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 1-22, January.
    19. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
    20. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    21. Konrad Zmitrowicz & Mikael Khan, 2014. "Beyond the Unemployment Rate: Assessing Canadian and U.S. Labour Markets Since the Great Recession," Bank of Canada Review, Bank of Canada, vol. 2014(Spring), pages 42-53.
    22. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    23. Arthur M. Okun, 1973. "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 207-262.
    24. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    25. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    26. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    27. Blanchard, Olivier J. & Romer, David & Spence, Michael & Stiglitz, Joseph E. (ed.), 2012. "In the Wake of the Crisis: Leading Economists Reassess Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026201761x, March.
    28. Laurence Ball, 2014. "Long-term damage from the Great Recession in OECD countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(2), pages 149-160, September.
    29. Farès, J. & Hogan, S., 2000. "The Employment Costs of Downward Nominal-Wage Rigidity," Staff Working Papers 00-1, Bank of Canada.
    30. Wayne Simpson & Norman E. Cameron & Derek Hum, 1998. "Is Hypoinflation Good Policy?," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 291-308, September.
    31. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
    32. Yellen, Janet L., 2012. "Perspectives on Monetary Policy : a speech at the Boston Economic Club Dinner, Boston, Massachusetts, June 6, 2012," Speech 641, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation target; zero lower bound; anchoring of expectations; downward nominal wage rigidity; Bank of Canada; inflation-control agreement; monetary policy.;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lvl:lacicr:1604. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Manuel Paradis). General contact details of provider: http://edirc.repec.org/data/cirpeca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.