How to Improve Inflation Targeting in Canada

IMF Working Papers, September 26, 2016

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How to Improve Inflation Targeting in Canada

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Bibliographic details

• Authors: Maurice Obstfeld, Kevin Clinton, Ondrej Kamenik, Douglas Laxton, Yulia Ustyugova, Hou Wang
• Published: September 26, 2016
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475541298.001

Key findings

• Routine publication of the forecast path for the policy interest rate (i.e. “conventional forward guidance”) would improve the transparency of monetary policy.
• Conventional forward guidance would 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.

Policy recommendations and implications

• Adopt routine publication of the forecast path for the policy interest rate (conventional forward guidance) to enhance transparency and shape inflation expectations.
• Coordinate conventional forward guidance with fiscal stimulus measures to more effectively restore output to potential when the policy rate is at or near the effective lower bound.
• Favor a combined forward guidance plus fiscal stimulus strategy over raising the inflation target in response to persistent declines in the world equilibrium real interest rate and ELB constraints.

Context, scope, and technical metadata

• Authors: Maurice Obstfeld, Kevin Clinton, Ondrej Kamenik, Douglas Laxton, Yulia Ustyugova, Hou Wang
• Date: September 26, 2016
• Series: IMF Working Papers; Working Paper No. 2016/192
• Issue: 192
• Volume: 2016
• Pages: 43
• DOI: https://doi.org/10.5089/9781475541298.001
• Stock No: WPIEA2016192
• ISBN: 9781475541298
• ISSN: 1018-5941

Subjects and keywords

• 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

Summary based on the IMF Working Paper "How to Improve Inflation Targeting in Canada" (IMF Working Papers 2016, 192).

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