tiff macklem : reflections on monetary policy after the great recession remarks by mr tiff macklem, senior deputy governor of the bank of canada, at the international finance club of montreal, montreal, 5 october 2010. * * * introduction i am delighted to be in montreal and to address the international finance club of montreal in the mount stephen club – a beautiful and elegant venue steeped in canadian and quebec history. it was founded by business leaders and is still a gathering place of grace and influence. as a native montrealer, i am particularly pleased to be coming home to deliver my first speech as senior deputy governor of the bank of canada. the mount stephen club opened its doors during the roaring twenties. as a meeting place for montreal ’ s business elite, a great many frank discussions must have taken place in its early days about the stock market bubble, the crash of ’ 29 and the ensuing great depression. it is with some humility that i suggest those discussions were likely similar to more recent conversations that have taken place within these walls about the credit boom, the financial crisis, and the great recession. what i thought i could do today is contribute to this tradition of frank discussion by sharing with you some of my reflections on monetary policy coming out of the great recession. my remarks today focus on three themes : what ’ s worked well what ’ s been missing and what needs to be brought back after a period of neglect after spending many years at the bank of canada, i was recently at the department of finance, where i was associate deputy minister and canada ’ s g - 7 and g - 20 deputy. during that time, i continued to work closely with the bank, as well as with the office of the superintendent of financial institutions ( osfi ) and other partners coordinating canada ’ s response to the financial crisis. but as far as monetary policy goes, that remained solely the purview of the bank of canada. i was a spectator like everyone else here today. so i offer these reflections as someone who was on the outside looking in during the great recession. global economic growth has returned although the great recession is now over and global economic growth has returned, it is not a great recovery. growth is uneven, and there is an unusual degree of uncertainty. globally, the financial crisis has left scars of lost output and jobs, declines in household wealth, impaired financial systems and large fiscal deficits. with households, financial firms and governments all deleveraging, the global recovery is expected to be

can effectively go and the lowest it has ever been in the bank ’ s 75 - year history. in addition, the bank provided extraordinary guidance on the likely path of interest rates that would be necessary to achieve the inflation target in order to maximize the monetary stimulus from its policy rate. the focus of monetary policy on inflation control through the financial crisis and global recession provided a beacon as well as an anchor for the bold policy response. the series of decisions that resulted in the policy interest rate being lowered effectively to zero reflected the symmetric commitment to target 2 per cent inflation. this policy response, coupled with the conditional commitment to keep the rate that low for a fixed period of time, allowed real interest rates to go negative and helped to re - establish confidence among businesses and households. the bank of canada provided a conditional commitment to keep the policy interest rate at one quarter of one per cent from april 2009 to mid - 2010 to provide additional monetary policy stimulus by influencing rates at longer maturities. the commitment was conditional on the outlook for inflation. in other words, it was based on the bank ’ s view that this path for the policy rate was consistent with hitting the inflation target. preliminary research on the effect of this conditional commitment indicates that expressing a specific period of time proved particularly effective. evidence suggests that the bank of canada ’ s conditional commitment lowered canadian interest rates out the yield curve relative to what their historical relationship with inflation and unemployment rates would imply. 2 but while canada ’ s inflation - targeting framework has served canadians well, this does not mean that we can rely on the commitment to price stability to ensure financial stability. in fact, stable inflation and the associated moderation in the economic cycle may have the first response of central banks to the crisis was to inject liquidity into the financial system, but this was designed to address financial stability while protecting the monetary policy interest rate. z. he, “ evaluating the effect of the bank of canada ’ s conditional commitment policy ” ( discussion paper no. 2010 – 11, bank of canada, 2010 ). encouraged excessive risk taking. the crisis reminds us that unless you ensure financial stability, you can ’ t achieve price stability either. this leads to my second theme. what ’ s been missing the great recession has forced us to look much more closely at crisis prevention. how do we stop history from repeating itself? the question forces us to broaden our view to consider the interaction among price stability, financial system stability, and the roles of monetary policy and other policy instruments