david dodge : inflation targeting - a canadian perspective remarks by mr david dodge, governor of the bank of canada, to the national association for business economics, washington dc, 21 march 2005. * * * good afternoon. three years ago, when i last addressed this group, i spoke about the conduct of monetary policy in the presence of economic shocks. in those remarks, i made passing reference to the bank of canada's inflation - targeting framework. today, i am happy to accept your invitation to return and talk in more depth about how we use inflation targeting as our monetary policy anchor. the invitation is timely, given that the bank of canada's inflation - targeting agreement with the canadian government is up for renewal next year. at the bank, we are always reflecting on our framework, deciding what works well and what we can improve. against that backdrop, we have watched with interest the debate taking place here in the united states - inside and outside the federal reserve - about whether that institution should join the ranks of inflation - targeting central banks. as part of that debate, the minutes of the february fomc meeting show that my colleagues at the fed had a discussion about the merits of inflation targeting last month. according to the minutes, arguments were made both for and against the adoption of an explicit inflation target. those in favour spoke of how such a target can anchor inflation expectations, add clarity to monetary policy decision making, and help with communications. those opposed said that the benefits of adopting a target were unlikely to be large, that adopting a target might bias or constrain policy, and that it might appear - and i stress the word " appear " - to be inconsistent with the fed's dual mandate to promote price stability and maximum employment. before i proceed with my remarks today, i want to make it absolutely clear that my purpose here is not to weigh in on the debate within the federal reserve. i would not presume to tell the fed what it should or should not do. rather, i want to talk about the canadian experience with inflation targets. however, in doing so, i will address some of the arguments raised at the fomc meeting that i just mentioned. i will begin by discussing the bank of canada's legislated mandate, and how inflation targeting helps us to meet the objectives of that mandate. i will then talk about some of the choices that we have made to establish and refine our particular framework. i'll discuss some of the benefits that we

independent central banks, governments could not credibly commit to maintaining low and stable inflation, since they subsequently had the incentive to violate that commitment by engineering a growth - boosting inflation surprise. this time inconsistency led to the unfavourable stagflation equilibrium of the 1970s, and ultimately resulted in the widespread operational independence of central banks. see f. kydland and e. prescott, “ rules rather than discretion : the inconsistency of optimal plans, ” journal of political economy 85 ( 3 ) ( 1977 ) : 473 – 92. see, for instance, c. l. evans, “ perspectives on current economic issues, ” a speech delivered to the bank of ann arbor breakfast, ann arbor, michigan, 18 september 2012. in most jurisdictions, including canada, a change in the policy framework would require the approval of the political authority. in some others, it would require a change in the constitution. bis central bankers ’ speeches targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal gdp ( chart 4 ). bank of canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history - dependent framework are likely to be modest, and may be further diluted if key conditions are not met. most notably, people must generally understand what the central bank is doing – an admittedly high bar. 20 however, when policy rates are stuck at the zero lower bound, there could be a more favourable case for ngdp targeting. the exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand. 21 of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation - targeting framework. conclusion companies can talk about their future performance, but cannot guarantee its delivery. central banks can talk about the future path of policy, and we can, at least on the surface, deliver. however, in ordinary times, achieving our objective will mean delivering a path of policy that adjusts as economic circumstances evolve. therefore, that path cannot be predicted with certainty in advance. in the bank ’ s view, this limits the effectiveness of policy guidance to relatively special circumstances. in extraordinary times, policy guidance may be more appropriate, and, as the bank has demonstrated with its conditional commitment, it can