High Definition: The Bank of Canada Should Take Tight Aim at a Lower Inflation Target - C.D. Howe Institute

TORONTO, Feb. 16 /CNW/ - Cutting the inflation target to 1 percent and measuring it more accurately would have lasting economic benefits that should outweigh short-term political objections, according to a study released today by the C.D. Howe Institute. In Precision Targeting: The Economics - and Politics - of Improving Canada's Inflation-Targeting Framework, McGill University economist Christopher Ragan proposes a coherent five-part policy package for a renewed monetary policy agreement, due in 2011, between the Bank of Canada and the federal government.

Professor Ragan proposes a coherent five-part policy package:

  1. The federal government should devote the necessary financial resources to Statistics Canada so that it can eliminate the most significant biases in the CPI over the course of the next few years.
  2. The Bank of Canada's formal inflation target should be reduced to 1 percent, perhaps gradually over the course of the new agreement.
  3. The federal government should announce its intention to indemnify the Bank of Canada against possible financial losses brought about through changes in the value of government bonds purchased during (possible future) episodes of quantitative easing.
  4. The new inflation-targeting agreement should mention explicitly the importance of financial stability, and that the Bank henceforth will take financial stability into consideration when conducting its monetary policy decisions.
  5. The federal government should direct the Ministry of Finance, the Bank of Canada, the Office of the Superintendent of Financial Institutions, and other relevant parties to ensure that, among them, they have the appropriate regulatory and oversight mechanisms in place, and responsibilities for actions clearly assigned, so that policy henceforth might be properly informed by concerns of financial stability.

Political arguments, or inertia, might stand in the way of adopting these policy changes, but their potential economic gains are significant enough for the country as a whole that they should be pursued, argues Professor Ragan.

For the study go to: http://www.cdhowe.org/pdf/Commentary_321.pdf

SOURCE C.D. Howe Institute

For further information:

Christopher Ragan, Associate Professor,
Economics, McGill University, and David Dodge
Chair in Monetary Policy, C.D. Howe Institute;
Philippe Bergevin, Policy Analyst, C.D. Howe Institute.
416-865-1904; cdhowe@cdhowe.org


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