level targeting was generally found to be more robust than inflation targeting to various forms of uncertainty, owing to its self - correcting nature. 16 one of the main concerns identified in 2006 therefore seems to have been addressed ; on balance, price - level targeting appears to be able to provide superior performance in a multi - good world characterized by large relative price shocks. 17 unfortunately, all of these encouraging results are derived from models in which agents are, for the most part, forward looking, and fully conversant with the implications of price - level targeting ; they also trust that policy - makers will live up to their commitment. simulation results reported by bank researchers suggest that if more than approximately 40 per cent of agents base their actions on rules of thumb or on backward - looking expectations, the dominance of price - level targeting no longer holds. further work is clearly needed to better understand the ways in which canadian businesses and households form their expectations, as well as the communication challenges that might arise if canada were to move to price - level targeting. if the learning curve is too long and expectations are too slow to adjust, the present value of any shift to price - level targeting could easily turn negative. 18 the bank is currently conducting some experimental work designed to shed light on both issues, and hopes to report its preliminary findings later this year. balancing monetary and financial stability the tension that can sometimes exist between the dual objectives of monetary and financial stability is an issue that has been brought to the fore by recent events. 19 central banks have been forced to re - examine the three tenets that i discussed earlier, and two of them have been effectively discarded. first, central banks no longer think that a strategy that relies exclusively on mopping up quickly after a bubble has burst is tenable. the costs of not taking pre - emptive action before a bubble bursts are potentially too high and, with regard to the response of the official sector, produce a destabilizing asymmetry that only encourages future misdeeds. 20 in addition, central banks are no longer as dismissive about the feasibility of identifying potential sources of financial instability before their macroeconomic consequences are felt. the one remaining complication concerns the third tenet described earlier – the fact that traditional monetary policy instruments are often a very heavy - handed means of dealing with financial sector vulnerabilities, especially if the potential source of instability is limited to a specific sector or area of activity. such cases call for more targeted measures and a wider set of instruments

john murray : re - examining canada ’ s monetary policy framework – recent research and outstanding issues remarks by mr john murray, deputy governor of the bank of canada, at the canadian association for business economics, kingston, ontario, 24 august 2010. * * * introduction i am honoured to address members of the canadian association for business economics. my remarks today will focus on critical issues that the bank of canada has studied over the past four years and how this research will inform our work as we move forward post crisis. central banks were forced to use extraordinary policy measures to combat the macroeconomic consequences of the 2008 – 09 financial crisis. the experience also raised fundamental questions about existing monetary policy frameworks, causing central banks to revisit issues that were long thought to be resolved. some critical observers even suggested that inflation targeting and the pursuit of price stability might be detrimental to financial stability and reduce economic welfare. the bank of canada, of course, like many other central banks, operates under an inflationtargeting regime. we continue to believe that this regime has served us exceptionally well, in both turbulent and tranquil times. nevertheless, we, like many of our counterparts elsewhere, are re - examining key features of our monetary policy framework in the light of recent events. however, we are doing so as part of an ambitious and long - standing research program initiated in 2006. this research will inform the renewal of the bank ’ s inflation - targeting agreement with the government in 2011. a great deal of innovative analysis and research have deepened our understanding of how the macroeconomy operates and helped us gauge the potential costs and benefits of alternative monetary policy frameworks. experience during the crisis and in the period immediately following has provided many important and cautionary lessons, and lent a greater sense of urgency and significance to the research work already under way. i would like to review the most important elements of this research effort with you today, and indicate how it has been informed and shaped by our recent “ battlefield experience. ” towards the end of my presentation, i will try to give you a sense of where things stand in our search for further improvements to the monetary policy framework, as well as some of the major outstanding issues. while much has been learned over the past four years, a great deal has yet to be resolved, and few definite conclusions will be presented. this is still very much a work in progress. where we were in 2006 in 2006, when our inflation - control agreement with the government was last renewed, the