How to Improve Inflation Targeting in Canada
September 26, 2016
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Summary
Routine publication of the forecast path for the policy interest rate (i.e. “conventional forward guidance”) would improve the transparency of monetary policy. It would also improve policy effectiveness through its influence on expectations, particularly when there is a risk of low inflation, and the policy rate is constrained by the effective lower bound. Model simulations indicate that a potent macroeconomic strategy, for returning the Canadian economy to potential, combines conventional forward guidance with a fiscal stimulus. As a response to the effective lower bound constraint, and the decline in the world equilibrium real interest rate, this strategy is preferable to raising the inflation target.
Subject: Banking, Central bank policy rate, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Real interest rates
Keywords: Canada, Central bank policy rate, exchange rate, fiscal policy, Global, Inflation, inflation expectation, inflation target, inflation targeting, interest rate path, monetary policy, Output gap, output-inflation trade-off, policy rate, rate of inflation, Real interest rates, WP
Pages:
43
Volume:
2016
DOI:
Issue:
192
Series:
Working Paper No. 2016/192
Stock No:
WPIEA2016192
ISBN:
9781475541298
ISSN:
1018-5941
