agathe cote : inflation expectations and monetary policy remarks by ms agathe cote, deputy governor of the bank of canada, to the association quebecoise des technologies, mont - tremblant, quebec, 19 february 2015. * * * accompanying charts can be found at the end of the speech. i would like to thank michael ehrmann and marc - andre gosselin for their help in preparing this speech. introduction thank you for inviting me to be with you today. i am delighted to be here. at the bank of canada we need a thorough understanding of what is happening in the economy – not only at the aggregate level, but also at the level of individual agents, such as entrepreneurs like yourselves. you have an impact on the economy, and thus on the bank. similarly, the bank has an impact on business conditions, and in turn on you. this relationship is well illustrated by the topic of my speech today : inflation expectations and the role they play in the conduct of monetary policy. central banks have long understood the importance of inflation expectations. it is widely accepted that a key benefit of an inflation - targeting system, such as the one we have had in canada since 1991, is that it provides a good anchor for expectations. that being said, there are still many questions about how people form their expectations. while central banks exercise a great deal of influence on expectations, there are many other factors that can come into play. so, therefore, it is critical to carefully measure and interpret the signals sent by a variety of economic agents. in my remarks today, i will explain why inflation expectations are so important to monetary policy and what role they might have played in the puzzling evolution of inflation that followed the financial crisis. i will also talk about the survey that the bank of canada has just created to better understand the evolution of expectations. finally, i will turn my attention to current events and talk about today ’ s inflation expectations, including those of the bank, in the wake of the steep decline in oil prices. the surprising evolution of inflation after the crisis the bank of canada conducts monetary policy to maintain the inflation rate at 2 per cent – the midpoint of a 1 to 3 per cent target range. since there is a lag in the transmission of monetary policy, the bank needs to identify the factors that are likely to have a persistent effect on inflation. the main determinant of underlying inflationary pressures is the output gap – the difference between actual output and potential output

throughout the three - year period. the central board of revenue ( cbr ) is being restructured to improve tax administration including taxpayer facilitation. economic governance : the most dramatic shift introduced by the military government is in promoting good economic governance. transparency, consistency, predictability and rule - based decision - making have begun to take roots. discretionary powers have been significantly curtailed. freedom of press and access to information has had a salutary effect on the behaviour of decision makers. the other pillars of good governance are, ( a ) devolution of power to the local governments who will have the administrative and financial authority to deliver public services to all citizens, and ( b ) an accountability process which will take to task those indulging in corruption through a rigorous process of detection, investigation and prosecution. despite these positive outcomes and their impact on the business community and other stakeholders, within the country as well as abroad, the incidence of poverty is still quite high and unemployment rates are worrisome. the challenge therefore for the next phase of the reform process is to accelerate growth rate and reduce poverty and unemployment. section iii policy lessons learnt : i now turn to the policy lessons learnt from the experience of last 50 years and the success achieved in reforming and restructuring pakistan ’ s economy during the last four years. with experiments running from state controls, liberalization, socialism, reversal to market mechanism, deregulation and privatization, there is today almost a consensus on the broad contours of economic policy in the country although the modalities, policy instruments and nuances differ as they ought to. my reading of the last 15 years suggests that the general thrust of pakistan ’ s economic policies broadly reflects the following lessons learnt from the past : ( a ) central planning has been a failure as it leads to low productivity, lack of innovation, lack of incentives, poor quality goods and services and low investment in human resources. bureaucratic judgment is a poor substitute for market ’ s judgment on allocation of scarce resources. ( b ) licensing to open, operate, expand, close business by the government functionaries is a sure way to promote rent - seeking in the economy for the benefits of a few while keeping the majority poor. the basic business decisions should not be made for the businessmen by the bureaucrats. ( c ) public sector ownership and management of business, production, distribution and trade do not capture the commanding heights but lead to a fall into the deep morass of inefficiency,