TORONTO, Dec. 11, 2012 /CNW/ - While transparency is critical to
well-functioning capital markets and effective monetary policy, forward
policy guidance is best used sparingly by central banks in normal
times, Bank of Canada Governor Mark Carney said today. In a speech to
the Toronto CFA Society, the Governor discussed where policy guidance
can be most effective and when it may be warranted.
"Central banks pursue transparency to be accountable in democratic
societies," Governor Carney said. Clear, open communications also
enhance the effectiveness of monetary policy. Success in this regard
requires transparency around what policy-makers are trying to achieve
and how they go about achieving it, he added.
Over time, the Bank of Canada has become significantly more transparent
in discussing the forces affecting the Canadian economy, in order to
help households, firms and financial market participants understand how
monetary policy will respond over time. This communication not only
promotes the appropriate formation of policy expectations, but allows
those expectations to evolve efficiently as new information is
The Bank of Canada occasionally provides guidance in normal times to
give a sense of the imminence and degree of prospective policy action,
and the important economic and financial factors influencing policy,
the Governor said. "This guidance is never a promise, however. Actual
policy will always respond to the economic and financial outlook as it
evolves. Expectations of policy should do the same."
More explicit policy guidance may be most useful in extraordinary times,
Governor Carney noted. For instance, in April 2009, when conventional
monetary policy had been exhausted, the Bank of Canada provided
additional stimulus by committing to hold the policy rate at its lowest
possible level, conditional on the outlook for inflation. "Our
conditional commitment worked because it was exceptional, explicit and
anchored in a highly credible inflation-targeting framework," he said.
Central banks needing to go further could also publicly announce precise
numerical thresholds for inflation and unemployment. If additional
stimulus were required, a framework change, such as adopting a nominal
GDP-level target, may be worthy of consideration, Governor Carney said.
He cautioned, however, that "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
SOURCE: Bank of Canada
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