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

zero trend inflation, working paper 2006 - 34 ( ottawa : bank of canada, 2006 ). other with laval professor kevin moran. 6 their early results suggest that this is an avenue worth pursuing further. but while there may be benefits to be gained from a lower inflation target, there may also be costs involved in getting there. as i mentioned earlier, canadians'expectations of inflation have now become firmly anchored on 2 per cent. adjusting those expectations down to a lower level, say 1 per cent, may not be easy, although the cost of lowering inflation expectations can be expected to be lower than when inflation targeting was first adopted, given the credibility that the bank – and our inflation - targeting framework – have acquired. however, the lengthening of non - indexed wage and debt contracts would raise some transition costs. two main arguments have traditionally been advanced against the idea of targeting a lower inflation rate. the first is the concern about downward wage rigidity : that it is more difficult to adjust real wages downwards in an environment of very low inflation because this will likely involve cuts to nominal wages. the second argument is that central banks could have problems implementing a stimulative policy in a very - low - inflation environment because nominal interest rates cannot go below zero. with respect to downward wage rigidities, research described at the time of the 2001 renewal of the target, 7 as well as labour market developments generally, do not appear to provide a compelling argument against a lower inflation target. but the zero - bound constraint on interest rates remains a critical issue. the adoption of price - level targeting, however, could help central banks deal with the zero - bound constraint. so let me now turn to the topic of price - level targeting. a target for the price - level path? the essential difference between a target for the price level ( which could rise over time ) and an inflation target is that under pure inflation targeting, past deviations from the target do not have an impact on the future targeted rate of inflation. movements in the price level that are perceived to be " one - off " events are ignored. bygones are bygones. but with price - level targeting, past inflation performance does matter. if inflation had been below trend, causing the price level to fall below target, monetary policy would need to generate above - trend inflation for a while in order to return the price level to the target over time. symmetrically, if inflation had been above trend, lifting the price level above its target,