EDMONTON, May 1, 2013 /CNW/ - While countries around the world continue
to cope with the painful aftermath of the global financial crisis, the
scope and fury of events have left policy-makers with important lessons
about the functioning of monetary policy and its frameworks,
instruments and tactics, Bank of Canada Governor Mark Carney said today
in a wide-ranging lecture about monetary policy "after the fall."
As the third Bank of Canada Governor to deliver the Eric J. Hanson
Memorial Lecture, Governor Carney cited previous Hanson Lectures by
Governors John Crow, in 1988, and David Dodge, in 2008, as important
works that had laid out the Bank's perspective regarding the evolution
of monetary policy prior to the crisis, including its firm, ongoing
commitment to price stability.
Today, in the wake of the global financial crisis, "fundamental
questions are being asked about monetary policy, its scope, and the
roles and responsibilities of central banks," Governor Carney said.
"Globally, central banks are now being simultaneously accused of being
ineffective and too powerful. The goals of monetary policy are being
called into question," the Governor stated. "It is also being
recognised that how monetary policy interacts with other macro
policies, including fiscal and macroprudential policies, can affect its
independence and potentially its effectiveness."
Governor Carney noted that price stability remains the paramount
objective of monetary policy. While the experience of the crisis
demonstrated the essential value of flexible inflation targeting as the
dominant monetary policy framework, events suggested some core lessons
that could influence its form and conduct.
First, price stability does not guarantee financial stability. Price stability can be associated with excessive credit growth and
emerging asset bubbles, which can ultimately compromise the achievement
of price stability. Further, stability can encourage excessive optimism
that can lead to overestimates of future growth in incomes and asset
prices, creating for a time a self-reinforcing asset and credit boom.
"Eventually," Governor Carney said, "the future is now and reality
Second, monetary policy is the last line of defence against financial
vulnerabilities. The first lines of defence (responsible behaviour by individuals and
institutions and micro- and macroprudential regulation and supervision)
will go a long way to mitigate the risk of financial excesses. On the
margin, monetary policy should be complementary to macroprudential
efforts that have already been instituted. Whether it should actively
lean depends on the severity of the imbalances and how effective the
macroprudential measures are expected to be. In exceptional cases,
monetary policy may be needed to support financial stability.
Third, central banks are not powerless at the zero lower bound. With the onset of the crisis, the zero lower bound went from remote
possibility to reality with frightening speed. This led central banks
to quickly develop unconventional measures to provide stimulus,
including credit easing, quantitative easing and extraordinary forward
guidance. "As with any policy action, the effectiveness of
unconventional policies requires that they remain credible and
consistent with well-anchored inflation expectations," Governor Carney
Fourth, communications matter. In April 2009, the Bank committed to hold rates at the zero lower bound,
conditional on the outlook for inflation, through the second quarter of
2010. "Our conditional commitment worked because it was exceptional,
explicit and anchored in a highly credible inflation-targeting
framework," Governor Carney said. By increasing the expected duration
of rates at the lower bound, guidance can lead to lower long-term
nominal rates. The increased certainty regarding the path of rates
reinforces this stimulative effect. "By outlining (and bounding) the
consequences of its strategy for near-term inflation dynamics," noted
Governor Carney, "the central bank can help anchor inflation
expectations and retain credibility."
Fifth, the limits of central banks' discretionary authority need to be
clarified. The time frame for returning inflation to target can be extended, but
the credibility essential for the success of such a tactic could be
undermined if such flexibility is taken too far, deployed too
frequently or undertaken by stealth. Further, the flexibility that
central banks may require, both to address the consequences of the
crisis and to reduce the risk of a repeat, raises a fundamental
question about the appropriate constraints on central banks' delegated
authority. "Making operational a more flexible role for monetary policy
requires clear frameworks," Governor Carney said, adding that a clear
framework enhances the accountability of the central bank and the
effectiveness of its monetary policy. "It is critical to have a clear
framework. The better this framework is understood by the public, the
greater the chance of success."
In concluding, the Governor noted that the fallout from the crisis has
increased the demands on monetary policy and has stretched the
flexibility of inflation-targeting frameworks. "It has been a
fascinating, sometimes harrowing, five years since Governor Dodge's
Hanson Lecture," Governor Carney said. "While the crisis left us with
many lessons, we still have much to learn."
SOURCE: Bank of Canada
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