The OECD and Price Level Targetting

The Bank of Canada is currently considering, through research, a shift from inflation targeting to price level path targeting.

For previous blog commentary and a good critique by Jim see

http://www.progressive-economics.ca/2006/12/03/bank-of-canada-inflation-targeting/

The general idea is that if inflation exceeds the target of 2% in any given year, the future price level path should be kept on course by keeping inflation below 2% in a subsequent period. (I don’t think they have in mind an increase to inflation to correct for any under-shooting of the annual target – which just happens to be the current situation. )

Price level targetting strikes me as a pretty dumb idea to the extent that it would depress growth and employment by keeping the economy deliberately below capacity if the Bank had missed its target.

(In fact, for good or for ill, Canadian inflation has averaged bang on the target since it was established, and rarely deviates very far from it.)

The OECD in their Economic Survey of Canada are much more polite than I, but they also don’t seem to think this is a very good idea.

“A reasonable assessment is that, at the present time, no compelling argument supports the view that changes to the current inflation-targeting regime would generate benefits that outweigh the possible costs ….. the burden of proof should lie with those who advocate reform.” (Economic Survey of Canada, June 2008. p.54.)