TOWARD 2021: REVIEWING THE MONETARY POLICY FRAMEWORK
Remarks by Carolyn A. Wilkins
Senior Deputy Governor of the Bank of Canada
McGill University Max Bell School of Public Policy
November 20, 2018
Montréal, Quebec
Choosing the Best Monetary Policy
Framework for Canada
"WHEREAS it is desirable to establish a central bank in Canada to regulate credit and
currency in the interests of the economic life of the nation, to control and protect the
external value of the national monetary unit and to mitigate by its influence fluctuations in
the general level of production, trade, prices, and employment, so far as may be possible
within the scope of monetary action, and generally to promote the economic and financial
welfare of Canada..."
Bank of Canada Act
Preamble,
It is a pleasure to speak here at the Max Bell School of Public Policy. As many of
you know, Bell was a shrewd business person and media mogul during an era
that witnessed the Great Depression, the Second World War and Canada joining
the world stage. He was also dedicated to public affairs and the greater good of
Canadians.
It is therefore fitting that I am here today to add to a conversation about the best
monetary policy framework for Canada. The Bank of Canada opened its doors
Bell's
during era, in 1935, to support the economic and financial welfare of
Canada. What that has meant in practice has naturally changed quite a lot over
the years to keep up with a complex and evolving world.1
Bank's monetary policy framework
For the last quarter of a century, the has been
focused on targeting low and stable inflation, in the context of a flexible exchange
- 2 -
Bank's goal, it is
rate. This is not just the shared with the federal government-
both acting on behalf of the people of Canada. This is formalized in what is called
the inflation-control agreement. It is renewed every five years and has been
supported by six prime ministers of different partisan stripes. We are working on
the next renewal, set for 2021, with our Finance colleagues.
Having a formal agreement with a democratically elected government supports
the credibility of our shared objective. It gives the Bank the independence it
needs to pursue that objective. The Bank has used this independence wisely. We
have delivered low and stable inflation-pretty darn close to our target of 2 per
cent on average over the last 25 years. We have managed to do this even in the
face of big economic shocks, such as the run-up of oil prices in the mid-2000s
and the plunge four years ago, and the global financial crisis in between.
Yet even a well-functioning monetary policy framework deserves an
openminded discussion, particularly in the post-crisis world we live in. There are a
couple of challenges facing our framework that mean it may not serve the
economic and financial welfare of Canada in the future as well as it has in the
past.
This is important. The objectives that we set and how we go about achieving
them have real implications for people in their everyday lives. This could not be
more obvious than it is today, as interest rates rise to more normal levels. This is
resulting in difficult adjustments in the finances of many. At the same time, the
Bank's actions are
supporting a stable economic environment for even more
households.
My remarks today are intended to spark a good discussion. I will focus on two
public policy questions that are shaping our work plan leading up to the 2021
renewal:
1. What alternative frameworks might do a better job than inflation
targeting, if any? We know there are contenders, but we have not
conducted a full horse race since the 1980s.
2. Regardless of whether we stick with inflation targeting or move to
something new, what supporting policies can we bring to the table? We
Bank of Canada's policy
know the toolkit, along with other public
policies, are critical to reinforcing our shared objectives.
Our research work will drill down in these areas, and will be informed by
extensive engagement outside the Bank. Our annual economic conference this
year, held a couple of weeks ago, was on this subject and yielded a very
productive debate. And, our research is being published as we go, so Canadians
can follow our progress.2
- 3 -
What are the main challenges for inflation targeting?
Let us remind ourselves what we are trying to achieve with our current monetary
policy objective of 2 per cent inflation. The most obvious answer is low, stable
and predictable inflation. In previous eras, episodes of runaway inflation in this
country and others led to major recessions and years of stagnant growth.
or
Yet pursuing this objective achieves more than just price stability "a nominal
anchor" as economists call
it: it steadies the economy at the same time.
Stabilizing purchasing power makes it easier to plan personal finances and
business investments. It also helps smooth the economic swings that result in job
losses and financial stress.
Despite these virtues, there are a couple of challenges linked to how we currently
do business that have grown in importance since the crisis. These were front and
centre of discussions at our annual conference.
One challenge is that the central bank is more likely to run out of conventional
firepower in the event of an economic downturn. By that I mean the ability to
lower the policy rate.3 The reason for this is straightforward. Our estimate of the
nominal neutral rate of interest-where monetary policy is neither stimulative nor
restrictive-is currently in the 2 1/2 to 3 1/2 per cent range.4 This is about
2 percentage points lower than in the early 2000s. Our policy rate cannot be set
much below zero, so there is now a lot less room to lower interest rates in
response to events that drag the economy down.
Estimates for Canada show that the probability of the Bank facing this challenge
is now about 13 per cent, instead of about 3 per cent when the neutral rate was
higher.5 There are unconventional policy tools that could be deployed in this
situation if needed, although as I will explain later, we still have much to learn
about their effectiveness.6
A second challenge is that the lower neutral rate may encourage households and
investors to take on excessive risk. This leaves the economy exposed to boom-
3
Bank of Canada research shows the policy rate could be lowered to -0.5 per cent if warranted,
effective
meaning the lower bound would be below zero. However, we consider a policy rate
below zero to be in the unconventional policy space. For more detail, see J. Witmer and J. Yang,
"Estimating Canada's Effective Lower Bank of Canada Review
Bound," (Spring 2016): 3-14.
4
See X. Chen and J. Dorich, Bank of Canada
"The Neutral Rate in Canada: 2018 Estimates,"
Staff Analytical Note No. 2018-22 (July 2018).
5
These estimates are based on simulations using the Terms-of-Trade Economic Model (ToTEM),
the Bank's main policy model. The simulation results assume an effective lower bound of
-0.5 per
cent and the same distribution of shocks as observed over the 1995Q1-2015Q4 sample.
6
See Framework for Conducting Monetary Policy at Low Interest Rates (Ottawa: Bank of
Canada, December 2015) and S. S. Poloz,
"Prudent Preparation: The Evolution of
(remarks to the Empire Club of Canada, Toronto, Ontario,
Unconventional Monetary Policies"
December 8, 2015).
- 4 -
bust financial cycles.7 It is a difficult problem, since monetary policy is ill-suited to
dealing with this. I will speak later about other tools that can be more effective.
My bottom line here is that although our inflation-targeting framework has served
us very well, we should look for ways to improve it.
What might do a better job?
This leads me to my first question: what other framework might do a better job?
The Bank of Canada is not alone in this line of inquiry. In fact, many influential
economists have urged us and other central banks to consider alternatives.
There are many out there, but the most popular ideas these days are (i) raising
the inflation target, (ii) targeting a path for prices or nominal income, or (iii)
adding full employment to our objectives.8
The Bank considered many of these alternatives as part of past renewal
processes. Yet we have not conducted a thorough side-by-side review of the
main options since the original agreement was struck in 1991.
It is time that we do so. We need to be as clear as possible about the criteria we
will apply in our assessment. My list of the most critical considerations in the
post-crisis era are:
First, the framework needs to focus only on objectives that monetary policy can
actually achieve. In the long run, monetary policy can only affect prices-this is
what economists refer to as the long-run neutrality of monetary policy. What this
implies is that monetary policy ultimately cannot resolve underlying, structural
issues, such as long-term competitiveness or the quality of jobs. It must therefore
focus on shorter-term stabilization objectives that help address cyclical issues
affecting the economy. In other words, objectives that smooth the business cycle.
These need to be clear and measurable, so that the public can plan accordingly
and the central bank can be held accountable. A case in point: the clarity and
simplicity of our inflation-targeting mandate has underpinned its success.
Second, the framework needs to support the well-being of Canadians-what I
like to call the greater good. This requires looking at more than how well a
7
R. Rajan, New York
"Why We Should Exit Ultra-Low Rates: A Guest Post by Raghuram Rajan,"
and H. S. Shin, "Money, Liquidity, and
Times, Freakonomics blog (August 25, 2010); T. Adrian
Monetary Policy," Federal Reserve Bank of New York Staff Report No. 360 (January 2009); C.
Borio and H. Zhu, "Capital Regulation,
Risk-Taking and Monetary Policy: A Missing Link in the
Transmission Mechanism?"
Bank for International Settlements Working Paper No. 268
(December 2008); C. A. Wilkins, (Official Monetary and
"(S)low for Long and Financial Stability"
Financial Institutions Forum City Lecture, London, United Kingdom, September 14, 2016).
8
A coalition of more than 60 Canadian economists signed a letter in May urging Finance Minister
Bill Morneau to expand the Bank's mandate to take goals such as "full employment" explicitly into
account. In the United States, leading scholars and policy-makers including Christina Romer,
David Romer, Lawrence Summers, Ben Bernanke, John Williams and Lael Brainard have urged
the US Federal Reserve to consider price-level or nominal gross domestic product targeting.
- 5 -
or "macro"
monetary policy framework performs in terms of aggregate outcomes,
although this is still central to success. Different monetary policy frameworks can
have different implications for other factors that matter to welfare such as
financial stability, as well as the distribution of income and wealth. To be clear, I
am not saying that the goals of monetary policy should be to target these factors,
or that it is easy to measure them. Rather, I am suggesting that we consider
them as best we can in the design of the framework.
Third, the framework should serve Canadians well in both good times and bad.
This requires a set of bedrock objectives that apply in all circumstances.9 The
framework needs an effective and credible set of policy tools at the ready to
achieve these objectives in both normal times and exceptional circumstances. It
also, ideally, rests on a foundation where other policies that affect economic and
financial stability complement monetary policy objectives.
Let me now turn to some of the main alternatives to our current framework and
give you a tour of what we know about them already, and highlight some of the
outstanding questions. Some of the options are like home renovations, work that
improves the existing framework. Others are more like buying a completely new
house. Those who look at the written version of my remarks will notice more
footnotes than usual-a testament to the depth of good work in this area.
What about renovating the current framework?
Canada's
For over two decades, monetary policy framework has centred on an
inflation target of 2 per cent-within a control band of 1 to 3 per cent-and a
floating exchange rate.10 The control band is there because inflation fluctuates in
that don't
response to temporary factors, such as changes in gasoline prices,
warrant a monetary policy response. It also allows the Bank to be flexible in how
aggressively we pursue the target. The Bank chooses the pace of interest rate
moves in a way that limits swings in aggregate income, while still achieving the
target within a reasonable timeframe. We might also adjust the pace to limit the
buildup of financial vulnerabilities.11
Some economists have suggested that we could address the issue of limited
firepower by raising the level of the inflation target to, say, 3 or 4 per cent.12 They
argue that a higher inflation target would restore some conventional policy room
9
See M. Carney, (speech to the U.S. Monetary
"A Monetary Policy Framework for All Seasons"
Policy Forum, New York, New York, February 24, 2012).
10
See "Why Has Canada's Inflation Target Been Set at 2 Per Cent?" Bank of Canada
backgrounder, May 29, 2012.
11
See "The Bank's Approach to Monetary Policy," Bank of Canada Renewal of
Risk-Management
the Inflation-Control Target: Background Information-October 2016.
12
Blanchard, G. Dell'Ariccia and P. Mauro, Journal of
See O. "Rethinking Macroeconomic Policy,"
L. M. Ball, "The Case for a
Money, Credit and Banking 42, no. 1 (2010): 199-215; Long-Run
Inflation Target of Four Percent," International Monetary Fund Working Paper No.
14-92 (June
2014); and J. C. Williams, "Heeding Daedalus: Optimal Inflation and the Zero Lower Bound,"
Brookings Papers on Economic Activity Fall
2009, no. 2: 1-37.
- 6 -
to manoeuvre, by allowing for a higher average nominal interest rate over time.
This approach would be more like a simple home renovation to make the
framework more effective in bad times.
Bank researchers examined this option during the last renewal cycle that was
completed in 2016. They found that higher inflation would be felt by everyone,
and most acutely by people living on fixed or lower incomes.13 Moreover, we
that the Bank's
were concerned credibility would be undermined if people thought
it was a slippery slope to even higher targets down the road. That seemed like a
steep price to pay for some insurance against bad times. Instead, we thought
that a credible set of unconventional policy tools could greatly reduce the need
for this type of insurance.14
Would more commitment to the level of prices help?
Now, a bigger innovation to the policy framework would be to set a target path for
the level of aggregate prices, rather than an inflation rate. This is akin to buying a
new house, but in the same neighbourhood.
For example, the central bank could commit to keeping the level of aggregate
prices on a steady growth path-say, 2 per cent a year. A way to implement this
would be to target an average inflation rate over the medium term.15 This type of
framework depends on history; target misses are not treated as bygones, unlike
under the current inflation-targeting regime. That means if inflation were to
undershoot 2 per cent, the central bank would be committed to making up for it
with higher inflation in later years. The opposite would be true with overshoots.
The Bank studied variants of price-level targeting (PLT) extensively leading up to
the renewal in 2011.16 This type of history-dependent framework could, in theory,
make monetary policy more effective, by reducing the frequency of encounters
with the lower bound for interest rates. And it would also make it easier to get up
from that level. Moreover, since lower- and middle-income households hold more
13
People in low-income households, especially the elderly, are more vulnerable to higher inflation
since they tend to rely more on nominal liquid assets like cash for transactions, which lose
purchasing power when inflation is high. See S. Cao, C. Meh, J.-V. Ríos-Rull and Y. Terajima,
"The Welfare Cost of Inflation Revisited: The Role of Financial Innovation and Household
Bank of Canada Staff Working Paper No.
Heterogeneity," 2018-40 (August 2018).
14
V. Lepetyuk and R. Mendes, "Could a Higher Inflation
See J. Dorich, N. Labelle St-Pierre,
Target Enhance Macroeconomic Stability?"
Canadian Journal of Economics 51, no.3 (July 2018):
1029-1055.
15
M. Nessén and D. Vestin, "Average Inflation Targeting,"
Journal of Money, Credit and Banking
37, no. 5: 837-863; W. C. Dudley, "Important Choices for the Federal Reserve in the Years
York City, April 18, 2018); "Rethinking the Fed's
Ahead" (speech at Lehman College, Bronx, New
2 Percent Inflation Target: A Report from the Hutchins Center on Fiscal & Monetary Policy at
Brookings with Contributions from Lawrence H. Summers, David Wessel, and John David
Murray," The Brookings Institution (June 2018).
16
See Targeting," Bank of Canada
"Price-Level Renewal of the Inflation-Control Target:
Background Information-November
2011.
- 7 -
long-term debt, such as mortgages, this type of framework could benefit them the
most because it would provide greater certainty about the real value of their
future debt payments.17
These benefits could only be realized if the regime were understood and
credible. In practice, people may not fully grasp how PLT works. And, promising
It
to make up for past errors is like saying "the cheque is in the mail." would take
time to establish trust in our commitment.18 Our researchers studied how people
would respond to PLT, in a laboratory-type setting right here in Montréal. They
concluded that participants found the idea too difficult to understand.19
Despite our earlier assessments, a question that we should pursue further is
whether the current low neutral rate environment changes the calculus on PLT or
average inflation targeting.
What about extending the objectives beyond prices?
There are other frameworks that are also like buying a new house, but in the next
the Bank's
town over. These include extending objectives beyond stabilizing only
prices to add, say, employment or nominal income.
Variants of these options were considered thoroughly in the 1980s before we
finally settled on inflation targeting in 1991. The Bank thought at the time that
inflation targeting alone would achieve similar outcomes to targeting stability of
like getting "two for one" and is now known
both prices and output. This is as the
"divine coincidence." The Bank also judged that the added complexity was not
worth the risk that comes with getting into territory better left to elected officials.
As it turns out, central banks that operate under a flexible inflation-targeting
regime already consider a range of labour-market indicators and other economic
activity measures when setting policy. These contain valuable information about
the future path of inflation, in keeping with the divine coincidence. When a
tradeoff between stabilizing inflation and real activity does arise, we consider both. In
this way, we already have something in common with dual-mandate central
banks, such as the US Federal Reserve and the Reserve Bank of New Zealand.
17
and Y. Terajima.
C. Meh, J.-V. Ríos-Rull "Aggregate and Welfare Effects of Redistribution of
Wealth under Inflation and Price-Level Targeting," Journal of Monetary Economics 57, no. 6
(2010): 637-652.
18
Research shows that benefits are eroded if people use rules of thumbs to form expectations
(Renewal of the Inflation-Control Target: Background Information-November 2011), or if they
doubt that the policy-maker will fully commit to maintaining a level path (G. Cateau and M.
Shukayev, "Limited Commitment, Endogenous Credibility and the Limits of Flexible
Price-Level
Targeting," Bank of Canada Staff Working Paper,
forthcoming).
19
R. Amano, J. Engle-Warnick and M. Shukayev, "Price-Level Targeting and Inflation
Bank of Canada Staff Working Paper No.
Expectations: Experimental Evidence," 2011-18
Kryvtsov and L. Peterson
(September 2011). In other experimental work, O. ("Expectations and
Bank of Canada Staff Working Paper
Monetary Policy: Experimental Evidence," 2013-44
[November 2013]) find that participants incorporate in their expectations the stabilizing responses
of monetary policy to fluctuations in inflation.
- 8 -
Canada's framework is less
That said, there are some differences. definitive
about the importance of employment and labour-market conditions in determining
the appropriate path for interest rates. This can matter, since monetary policy can
have different distributional consequences, depending on the weights placed on
the objectives.20 In fact, redistribution is a channel through which monetary policy
can play a stabilizing role: those who gain the most from expansionary monetary
policy are more likely to spend a greater share of their disposable incomes on
consumption.21
We need to update our analysis of the trade-offs, given the structural changes in
the Canadian economy over the last few decades. Does the divine coincidence
still hold as well as it did in the past? Could monetary policy under a dual
mandate be as effective as fiscal policies-such as taxes and transfers-at
achieving full employment?
An alternative to a dual mandate would be to target the growth rate or level of
nominal gross domestic product (GDP).22 While technically quite different, I see
this as being in the same neighbourhood as the dual mandate because it puts
more weight on other aspects of the economy that matter for welfare.
Nominal GDP targeting has received renewed attention recently because it could
reduce the chances of running out of conventional firepower, much in the same
way as PLT. It also allows more flexibility to deal with situations where there is a
trade-off between price and output stabilization. A good example of this is when
oil prices are rising in an economy that is a net importer of oil, because this
pushes inflation up while also weakening the economy.
Still, adopting a nominal GDP target shares the same drawbacks I mentioned
earlier with respect to other frameworks like PLT or a dual mandate. There are
other practical issues too, because GDP is subject to frequent revisions, and so
the objective would be a moving target. More research is needed here as well.
20
N. Gornemann, K. Kuester and M. Nakajima, "Doves for the Rich, Hawks for the Poor?
Distributional Consequences of Monetary Policy," Board of Governors of the Federal Reserve
System International Finance Discussion Paper No. 1167 (May 2016).
21
A. Auclert, "Monetary Policy and the Redistribution Channel," National Bureau of Economic
Research Working Paper No. 23451 (May 2017); O. Coibion, Y. Gorodnichenko, L. Kueng and J.
Silvia, "Innocent Bystanders? Monetary Policy and Inequality," Journal of Monetary Economics 88
L. Violante, "Monetary Policy According to HANK,"
(June 2017): 70-89; G. Kaplan, B. Moll and G.
American Economic Review 108, no. 3 (2018): 697-743; M. Doepke and M. Schneider, "Inflation
and the Redistribution of Nominal Wealth,"
Journal of Political Economy 114, no. 6 (December
2006): 1069-1097; C. Meh, J.-V. Ríos-Rull and Y. Terajima, "Aggregate and Welfare Effects of
Targeting,"
Redistribution of Wealth Under Inflation and Price-Level Journal of Monetary
Economics 57, no. 6 (September 2010): 637-652; C. Meh and Y. Terajima, "Inflation, Nominal
Portfolios and Wealth Redistribution in Canada," Canadian Journal of Economics 44, no. 4
(November 2011): 1369-1402.
22
"Dear Ben: It's Time for Your Volcker
C. Romer, Moment," New York Times, October 29, 2011,
BU6; J. Frankel, "Nominal-GDP Targets, Without Losing the Inflation Anchor," in Is Inflation
Targeting Dead? Central Banking After the Crisis, edited by R. Baldwin and L. Reichlin (London:
Centre for Economic Policy Research, 2013): 90-94; L. Summers, "Why the Fed Needs a New
Monetary Policy Framework," The Brookings Institution (June 2018).
- 9 -
The bottom line is there are several intriguing frameworks that merit further
exploration, although none is perfect. This is why I want to see a side-by-side
assessment of them, based on the considerations I outlined earlier. It will be
impossible to do a purely quantitative assessment, given the limitations of policy
models and the data, so a heavy dose of judgment will be required. That is okay;
we will have a good basis to challenge the status quo.
What are the supporting policies?
question, which is how the Bank of Canada's toolkit,
Let me turn to my second
along with other public policies, can support whatever monetary policy framework
we end up choosing.
This is critical, since none of the options materially changes the need for an
unconventional policy toolkit. The Bank has a full range of unconventional policy
tools, including explicit forward guidance about interest rates, negative nominal
interest rates, and programs such as quantitative easing and other types of asset
purchases. During the crisis, the Bank successfully used a conditional
commitment to guide market expectations about future interest rates. We
pledged in April 2009 to leave the policy rate unchanged for a year, depending
on the outlook for inflation.23
The Bank has never had to use negative nominal interest rates, quantitative
easing or other asset purchases, although these have been implemented in other
countries. The unconventional tools used in the United States and Europe in the
wake of the crisis prevented a bad situation from becoming even worse. That
said, whether these tools are effective at achieving inflation objectives is still an
area of debate.24 It is also too early to tell whether they have important negative
spillovers, particularly if they are used for a long time.
Because of this, improving clarity about our toolkit as part of the inflation-control
agreement is a necessary step forward. Having a credible contingency plan in
place makes it easier to achieve the inflation target, even in normal times.25
There are several lines of inquiry here. One is a suggestion highlighted by former
Federal Reserve Chair Ben Bernanke to stick with inflation targeting in normal
times but switch to a temporary price-level target when conventional policy is
23
See Z. He, "Evaluating the Effect of the Bank of Canada's Conditional Commitment
Policy,"
Bank of Canada Staff Discussion Paper No. 2010-11 (August 2010). For more on how the
conditional commitment and other examples of forward guidance have worked in practice, see M.
Woodford, "Methods of Policy Accommodation at the Lower Bound." In
Interest-Rate Proceedings
- Economic Policy Symposium - Jackson
Hole, 185-288. Jackson Hole, Wyoming: Federal
Reserve Bank of Kansas City.
24
A. Reza, E. Santor and L. Suchanek, "Quantitative Easing as a Policy Tool Under the Effective
Lower Bound," Bank of Canada Staff Discussion Paper No. 2015-14 (November 2015); S. D.
Williamson, "Quantitative Easing: How Well Does This Tool Work?" Federal Reserve Bank of St.
Louis Regional Economist (third quarter 2017).
25
Leduc, "Precautionary Pricing: The Disinflationary Effects of ELB
R. Amano, T. Carter and S.,
Risk," Bank of Canada Staff Working Paper (forthcoming).
constrained by the lower bound.26 The idea is that making it clearer in
extraordinary circumstances that the central bank is aiming for higher inflation
would help push up prices through a shift in expectations. This is another idea for
Japan's experience with trying to
the list, but undoubtedly imperfect as well.
boost inflation expectations raises questions about how successful this type of
strategy might be, particularly in the current low inflation environment.27
This prompts a more delicate question about how much heavy lifting monetary
policy should actually do.28
Most countries have some automatic fiscal stabilizers in place, such as
unemployment insurance or a progressive income-tax schedule, which help
during a downturn. Preliminary work at the Bank suggests that, compared with a
"the only game in
situation where monetary policy is town," the stabilization
properties of the Canadian fiscal system do help reduce the chances of the policy
rate being below zero.29
Several participants at our recent conference on the inflation-targeting framework
raised the question of which combination of monetary and fiscal policies is best
suited to address extraordinary circumstances. At the same time, context
matters: fiscal policy needs to be on a sustainable track for monetary policy to
achieve price stability.30 These are important issues for further study, but they are
central bank's
outside the remit.
26
See B. Bernanke, "Temporary
Price-Level Targeting: An Alternative Framework for Monetary
Policy," The Brookings Institution, (October 2017); R. Mendes and S. Murchison, "Should
Forward Guidance Be Backward-Looking?" Bank of Canada Review (Autumn 2014): 12-22; and
"From Taylor's Rule to Bernanke's Temporary Price Level
J. Hebden and D. López-Salido,
Targeting," Board of Governors of the Federal Reserve System Finance and Economics
Discussion Series (FEDS) Working Paper No. 2018-051 (July 2018). Mendes and Murchison
(2014) explore a similar idea to Bernanke (2017) but through state-contingent forward guidance.
27
See H. Nakaso, "Evolving Monetary Policy: The Bank of Japan's Experience" (speech at the
Central Banking Seminar, hosted by the Federal Reserve Bank of New York, 2017).
28
Proceedings - Economic Policy
E. M. Leeper, "Monetary Science, Fiscal Alchemy." In
-
Symposium Jackson Hole, 361-434. Jackson Hole, Wyoming: Federal Reserve Bank of
Kansas City; M. Eichenbaum (2018), Talk at G7 Meeting on Unconventional Fiscal Policy
S. S. Poloz,
(presented at Montebello, Quebec); "The Doug Purvis Memorial Lecture-
Bank
Monetary/Fiscal Policy Mix and Financial Stability: The Medium Term Is Still the Message,"
of Canada Staff Discussion Paper No. 2016-13 (June 2016); and C. Meh and S. S. Poloz,
"Investing in Monetary Policy Sovereignty: Ideas from the Periphery," paper for
conference
"Monetary Policy Spillovers in a Financially Integrated World," National Bank of
proceedings
Denmark (2018).
29
ToTEM simulations show that if government expenditures and transfers did not respond at all
to the economic cycle, the probability of the policy rate being below zero would be about 17 per
cent instead of about 13 per cent.
30
"One Decade of Inflation Targeting in the World: What
F. S. Mishkin and K. Schmidt-Hebbel,
Do We Know and What Do We Need to Know?" National Bureau of Economic Research Working
Paper No. 8397 (July 2001); T. J. Sargent and N. Wallace, "Some Unpleasant
Monetarist
Arithmetic,"
Federal Reserve Bank of Minneapolis Quarterly Review 5, no. 3 (Fall 1981): 1-17; C.
Sims , "Fiscal Policy, Monetary Policy and Central Bank Independence," (paper delivered to
Economic Policy Symposium, Jackson Hole, Wyoming, August 25-27, 2016); F. Bianchi and L.
There is an emerging consensus that effective macroprudential policies can also
give monetary policy more room to manoeuvre. For example, during a period in
which policy interest rates are low for a long time, a tightening of
mortgagefinancing rules or eligibility criteria can lean against a buildup in financial
vulnerabilities such as elevated household debt. That allows more room for
monetary policy to focus on bringing inflation to target.
There is still much to learn about the effects of different macroprudential
measures and their interaction with monetary policy. As we learn more, we can
take a page from the inflation-targeting book. This means working with our
partners to further strengthen the macroprudential policy framework by being
clearer about objectives, tools and governance. Doing so would enhance the
predictability and efficiency of both macroprudential and monetary policies.
Conclusion and next steps
Let me conclude with a few words on the direction our work will take leading up
to the next agreement on Canada's monetary policy framework in 2021.
There is no doubt that our inflation-targeting framework has promoted the
economic and financial well-being of Canadians. A decade of experience in the
post-crisis world, though, shows us it is not perfect.
It is time to conduct a thorough review of the alternatives. The Bank will develop
a comprehensive side-by-side assessment of the most promising frameworks to
see if any are better. In its work, the Bank will engage with academics and other
central banks, as well as a wide range of private sector stakeholders and
interested Canadians.
We need to keep it simple: focus on clear objectives that monetary policy can
actually achieve, and assess how it affects people. This is more ambitious th