Flexible Yet Firm - How to Improve Inflation Targeting Regime: C.D. Howe Institute



    TORONTO, Aug. 27 /CNW/ - Canada's inflation targeting regime could be
improved with an optimal degree of flexibility for policymakers and a firmer,
lower target band, according to a study released today by the C.D. Howe
Institute. In How Flexible Can Inflation Targeting Be? Suggestions for the
Future of Canada's Targeting Regime, Queen's University economist Thorsten V.
Koeppl examines how much discretion an inflation-targeting Bank of Canada can
be allowed without compromising the credibility of its low inflation goal. He
makes three specific suggestions for improving the regime when it comes up for
review in 2011:

    
    -   The inflation target band should be moved down to zero to 2 percent,
        and 2 percent should become a cap on inflation that triggers a policy
        reaction, once inflation threatens to breach this bound. These
        changes would strengthen the Bank's commitment to price stability and
        more firmly anchor the public's inflation expectations.

    -   Policy flexibility should be enhanced by permitting variation in the
        time horizon over which the inflation target is regained after a
        deviation. Large shocks that pose a threat to financial stability
        could provide a rationale for lengthening this horizon.

    -   Explicit inflation-forecast targeting should be adopted. Such
        targeting would involve regularly updating a forecast time path for
        inflation and for the interest-rate changes needed to achieve it.
    

    For the study click here. http://www.cdhowe.org/pdf/commentary_293.pdf





For further information:

For further information: Thorsten Koeppl, Queen's University, or David
Laidler, C.D. Howe Institute, (416) 865-1904


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