2007 Economic Outlook and Policy Forum
I have just returned from the annual conference of the Canadian Association for Business Economics in Kingston. On Monday evening, we heard from Pierre Duguay, a Deputy Governor of the Bank of Canada. Without specifically mentioning Jim’s Globe column, he suggested that some people mistook the Bank’s intervention in financial markets as a deviation from monetary policy’s exclusive focus on inflation control. He argued that ensuring the financial market’s overall stability is a function completely separate from monetary policy.
An audience member asked whether inflation targeting could be evaluated in comparison to any historical attempt at employment targeting or real-GDP targeting by central banks. Duguay’s response was that, while monetary policy has side-effects on the real economy, it can only influence nominal values (i.e. inflation) over the long term. This answer seemed to reflect some circularity in the Bank’s reasoning: starting from the premise that monetary policy can only influence inflation, it concludes that monetary policy should target inflation.
On Tuesday morning, Mike McCracken delivered a fantastic presentation that left the Bank view in tatters. He pointed out that positive evaluations of recent monetary (and fiscal) policy are based on comparing current economic conditions (especially the unemployment rate) with the early 1990s recession, which itself resulted from the Bank’s excessively tight monetary policy. He also noted that seniors, who Duguay indicated need very low inflation because they live on fixed incomes, actually receive public pensions that are fully indexed to inflation.
McCracken’s fiscal forecasts suggest that, as Canadian governments move into a net asset position, they will collect substantial investment income in addition to tax revenues. These sensible forecasts are a useful antidote to the panic that an aging population will destroy fiscal balances by creating labour shortages, driving up healthcare spending and bankrupting public pensions.
I also noticed the BOC plugged a BOC blog site called http://www.inflationtargeting.ca/ in their remarks. Comments are off, but I guess it’s good that they’re talking about the issue….maybe they’ll turn comments on one day? : )
I appreciate the kind words about my presentaton, but suspect that Bay Street economists would have found it less exciting.
Duguay’s comment on the Bank of Canada only affecting nominal amounts is perhaps correct, but I take that to mean that their actions affect the combination of real and price components which we define through index numbers. They should be responsible for both the real outcomes (unemployment) as well as inflation.