This grim sentiment: Canadians are losing faith in the price index and it worries central bankers


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When policymakers began to think about what questions they should explore in 2017, the focus shifted to whether there was a better way to fix interest rates than to target an annual increase of 2% of the CPI, the Bank of Canada approach. since the early 1990s.

It is essential that we measure inflation as accurately as possible so that Canadians have confidence in our target.

Carolyn Wilkins

This work is progressing. Rhys Mendes, chief executive of international economic analysis at the central bank, presented at a virtual conference on August 26 an overview of the preliminary results of the “horse race” that officials are leading between a set of popular theories on how central banks should conduct monetary policy.

So far, the current regime is working well. Adding an employment target to the inflation target also produces positive results, as does a framework that attempts to achieve an average inflation rate over a longer period. Mendes had less positive things to say about two other approaches that are popular with academics: price level targeting, which would require setting interest rates to get a specific rise in the CPI rather than a rate of change; and the idea that central banks should aim for some variation in nominal gross domestic product.

To be sure, Bank of Canada research so far finds only marginal differences between all approaches. “I’m not sure the gains would justify dropping the current term,” said Mendes, who at the start of his presentation made it clear he was speaking for himself and not Gov. Tiff Macklem, Wilkins and the other members of the Board of Directors.


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