Economics
Inflation Targeting in Canada
Inflation targeting in Canada refers to the monetary policy framework where the central bank sets a specific target for the inflation rate and adjusts its policy instruments to achieve that target. The Bank of Canada has employed this strategy since the early 1990s, aiming to keep inflation within a target range of 1 to 3 percent. This approach provides transparency and accountability in monetary policy decision-making.
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10 Key excerpts on "Inflation Targeting in Canada"
eBook - ePub- Benjamin M. Friedman, Michael Woodford(Authors)
- 2010(Publication Date)
- North Holland(Publisher)
Monetary Economics , Vol. Suppl., No. 2011ISSN: 1573-4498doi: 10.1016/B978-0-444-53454-5.00010-4Chapter 22 Inflation Targeting*Lars E.O. Svensson, Sveriges Riksbank and Stockholm UniversityAbstract AbstractInflation targeting is a monetary-policy strategy characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast that has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and as of 2010 has been adopted by about 25 industrialized and emerging-market economies. This chapter discusses the history, macroeconomic effects, theory, practice, and future of inflation targeting.JEL classification E52 E58 E42 E43 E47Keywords Flexible Inflation Targeting Forecast Targeting Optimal Monetary Policy Transparency1 Introduction
Inflation targeting is a monetary-policy strategy that was introduced in New Zealand in 1990. It has been very successful, and as of 2010 had been adopted by approximately 25 industrialized and nonindustrialized countries. It is characterized by (1) an announced numerical inflation target, (2) an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and (3) a high degree of transparency and accountability (Svensson, 2008
eBook - PDFInflation Targeting and Policy Rules
The Case of Mexico, 2001-2012
- Oscar R. Medina, Elias A. Laguna(Authors)
- 2016(Publication Date)
- Apple Academic Press(Publisher)
Among the economies of emerg-ing countries are Brazil, Chile, and Mexico. Inflation targeting is a mecha -nism that reduces the desire for policy discretion by the authorities’ and reduces the costs of the process of deflation, while it increases the credibil -ity of the monetary authorities. However, the expected inflation rate and, therefore, inflation expectations will be reduced, provided the central bank demonstrates that it is able to obtain low inflation rates. Inflation targeting should be understood as “a policy framework that increases the credibility of the monetary authorities through transparency and the ability to maintain some level of consistency in situations in which the policy discretion arises” (Bernanke and Mishkin, 1997). Monetary au-1 There is a debate that this has not yet been defined in the sense that Chile began to implement the inflation targeting in unison with New Zealand. For its part, Mexico officially adopted the scheme in 2001. 32 Inflation Targeting, and Policy Rules thorities make use of complementary measurements of inflation, such as underlying inflation, to isolate those phenomena that transiently affect in -flation and identify the trend of medium-term growth of prices. The calcu -lation of underlying inflation serves to minimize variations in the National Index of Consumer Prices (Indice Nacional de Precios al Consumidor) , stabilize, and eliminate – in a specific way – strong fluctuations in the level of prices. However, the successful application of the system of inflation target -ing requires consideration of all the characteristics of the country, as well as the inherent consequences of such application to the stabilization of prices, and is relatively simple. The substantial contribution of inflation targeting is that the authorities settle for shorter time periods (a year), thus, the authorities create certainty and trust among agents.
eBook - PDFInflation Targeting
Lessons from the International Experience
- Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, Adam S. Posen(Authors)
- 2018(Publication Date)
- Princeton University Press(Publisher)
Japan has recently announced its intention to adopt inflation targets. Moreover, most o f the elements o f inflation targeting can be f o u n d i n the long-standing and well-regarded monetary policy o f Germany and Switzerland. 1 I n the U n i t e d States, inflation tar- geting has attracted some influential advocates, both w i t h i n and outside the Federal Reserve System. For example, a b i l l introduced by Congress- m a n B i l l Saxton ("The Price Stability Act o f 1997") calls explicitly for the use o f inflation targets by the Fed. 2 Finally, the Maastricht Treaty, the basis for the proposed European monetary u n i o n , mandates price sta- bility as the primary objective o f the new European Central Bank. The European Monetary Institute has stated that "the list o f potential candi- date strategies [for the future ECB] has been narrowed down to two, namely monetary targeting and direct inflation targeting." 3 What Is Inflation Targeting? Inflation targeting is a framework for monetary policy characterized by the public announcement o f official quantitative targets (or target ranges) for the inflation rate over one or more time horizons, and by explicit ac- knowledgment that low, stable inflation is monetary policy's primary long- r u n goal. A m o n g other important features o f inflation targeting are vigor- ous efforts to communicate with the public about the plans and objectives o f the monetary authorities, and, i n many cases, mechanisms that strengthen the central bank's accountability for attaining those objectives. A Framework, Not a Rule A principle theme o f this book is that, i n practice, inflation targeting serves as a framework for monetary policy rather than as a rule for m o n - etary policy. This distinction requires a bit o f explanation.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
3 7 MONETARY POLICY AND INFLATION TARGETING PAVEL S. KAPINOS Carleton College DAVID WICZER University of Minnesota I nflation targeting (IT) is a framework for the conduct of monetary policy, under which the monetary authority announces a medium- or long-run inflation target and then uses all available information to set its policy instrument, the short-term nominal interest rate, so that this target is met. Short-lived deviations from the inflationary target may be acceptable, especially when there may be a short-run trade-off between meeting the target and another welfare consideration, for example, the output gap—the difference between actual and potential output. Hence, although the central bank commits to meeting a certain inflationary target, in practice, IT takes a less rigid form, with the central bank exercising some discretion over the path of actual inflation toward its tar-get. Recently, dozens of central banks around the world have introduced IT as their operational paradigm. Numerous studies indicate that this policy has been suc-cessful in achieving macroeconomic stability at no long-run cost in terms of lower real activity. Many central banks that have not explicitly subscribed to IT have been shown to follow it implicitly. IT provides a way for the central bank to communicate its intentions to the public in a clear, unequivocal manner, making the conduct of monetary policy more transparent and predictable. Transparency allows the public to hold the central bank accountable for its policy actions. In fact, in some countries, inflation-targeting central banks are subject to intense public scrutiny from the legislative bodies. Predictability of monetary policy allows the cen-tral bank to manage public inflationary expectations and better anchor them around the inflationary target; this allows the central bank to achieve macroeconomic stabil-ity more effectively.
eBook - PDF- R. Leeson(Author)
- 2010(Publication Date)
- Palgrave Macmillan(Publisher)
From Money Targeting to Inflation Targeting 131 short-term market interest rates, and, to a lesser extent, long-term interest rates, as well as to an appreciation of the exchange rate. These, in turn, would slow the growth of aggregate demand (relative to capacity) and bring about a lower rate of inflation. Essential to the sequence of events in the latter approach were two precondi- tions. First was stability in the demand for money. This was necessary so that the appropriate signal would be forthcoming regarding the pace of growth of nom- inal spending and the needed change in interest rates. Second, the response of interest rates to the deviation between money and targeted money had to exert appropriate effects on demand and inflation. While the Bank of Canada was successful in gradually reducing the rate of growth of M1, it was less successful in keeping down the rate of inflation after an initial slowing. This lack of success in reducing inflation in the context of a significant decline in M1 growth was due to the fact that the two preconditions needed for monetary aggregate targeting were not met. The first and more important problem was the instability in the demand for money, especially in the early 1980s. Indeed, this type of instability in the money demand relationship turned out to be a problem in most countries. While econo- mists initially attributed the instability to the deregulation of financial institu- tions and markets that was then going on in many countries, it occurred also in some countries that had deregulated much earlier. In those countries, and Canada was one of them, the instability seemed to be related to innovations initiated by financial institutions in which they changed the characteristics of the various financial instruments and services that they offered to the public (Courchene, 1983; Freedman, 1983).
- Robert Leeson(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
In that case, the central bank will minimize (2) subject to (1), taking the value of p t e as predetermined. Thus it will set 58 Inflation Targeting in Canada indefinitely large, and who would therefore approximate the first-best inflation target even though not constrained to do so. Thus inflation-targeting has been embraced by many monetary economists as a way, although perhaps not the only way, to avoid the useless inflationary bias of benevolent but uncommitted central banks who cannot be counted on to resist the temptation to help society by giving it a bit of surprise inflation. In effect, this is exactly the opposite of the adaptive view explained above, for while the game-theoretic analysis would rationalize inflation targeting as a way to use rules rather than discretion, the adaptive view sees them as an example of discretion rather than rules. 2.3.2.1 The New Keynesian view I digress briefly to discuss (a simplified version of) the variant of this argument presented by Svensson and Woodford (2005), who replace the “neoclassical” Phillips curve (1) by a “New Keynesian” version: p bp e b t t t b u v 1 0 1 1 ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ ( ) t e , , (7) in which what matters on the right-hand side is not last period’s expec- tation of this period’s inflation but this period’s expectation of next period’s inflation, with a coefficient less than unity, and where explicit account is taken of the random price-shocks, e t . Svensson and Woodford also consider an explicitly dynamic loss function equal to the expected discounted value of (2) for all periods. Using this variant, they argue that the bank needs to be committed to inflation targets not just to avoid the inflation bias of discretion but also to avoid what they call the “stabilization bias” of discretion.
eBook - PDF- J. McCombie, C. Rodríguez González, J. McCombie, C. Rodríguez González, Kenneth A. Loparo, Carlos Rodríguez González(Authors)
- 2007(Publication Date)
- Palgrave Macmillan(Publisher)
28 3 Inflation Targeting: Assessing the Evidence Alvaro Angeriz and Philip Arestis Introduction Inflation targeting (IT) as a policy framework, designed to tame inflation, has been with us since the early 1990s. Recent work makes the point that a significant number of countries adopted this strategy, and the number is growing. For example, Sterne (2002) suggests that 54 coun- tries pursued one form or another of IT by 1998, compared with only six in 1990. A more recent study (IMF, 2005) suggests that 21 countries (8 developed and 13 emerging) are now clear inflation targeters, pursu- ing a fully-fledged IT strategy (FFIT). Indeed, a number of other coun- tries are seriously considering the adoption of this strategy. Many studies have attempted to examine empirically the degree and extent of the impact of IT on inflation in various countries. We review this litera- ture in what follows and conclude that the available empirical evidence produces mixed results. In pursuing an IT strategy, countries commit themselves to price stabil- ity as the main objective of monetary policy, along with stipulating that medium- to long-term inflation is the nominal anchor where an inflation target is set. There are, of course, varying degrees of commitment to IT amongst countries. In more general terms, one may distinguish between three types of inflation targeting: the FFIT, as suggested above, the ‘Inflation Targeting Lite’ (ITL) type, and the ‘Eclectic Inflation Targeting’ (EIT) type. 1 The main distinguishing feature is the degree of clarity and institutional commitment to price stability. 2 Along with this commitment, an explicit inflation target (either point- or range-inflation target) is set; absence of other nominal anchors, policy instrument independence and absence of fiscal dominance, transparency, accountability and credibility of the com- mitment to IT by the central bank are further requirements (Mishkin
No longer available |Learn more- Edwin M. Truman(Author)
- 2003(Publication Date)
The focus of this study is inflation targeting in the world economy and how applicable the monetary policy framework is to a broad range of countries. From this perspective, the principal question is the role infla-tion targeting plays on average in overall economic performance includ-ing the trade-offs between inflation and growth and between the vari-ability of inflation and the variability of growth. Also of interest is the question of whether one can identify structural features associated with the economies of some potential inflation targeters—for example, their external environments—that suggest inflation targeting in general is contra-indicated as a framework for monetary policy. Specifically, the following questions are examined: 1. What factors are strongly associated with the level and variability of inflation? 2. Can one detect an influence of inflation targeting in general on the level or variability of inflation? 3. Can one detect an influence of inflation targeting in general on the level or variability of growth? 4. What light can be shed on the question of the external circumstances or vulnerability of countries that suggest inflation targeting may be more or less successful for them in general as their framework for monetary policy? 5. Is there evidence that countries that have adopted inflation targeting on average have achieved lower inflation at the expense of lower growth (moved along the Phillips Curve) and lower inflation variabil- ity at the expense of higher growth variability (moved along the Taylor Curve relating those two variables), as skeptics have suggested? 6.
eBook - PDF- Ben S. Bernanke, Michael Woodford, Ben S. Bernanke, Michael Woodford(Authors)
- 2007(Publication Date)
- University of Chicago Press(Publisher)
Because an explicit numerical target for inflation increases the accountability of the central bank relative to a dis-cretionary regime, inflation targeting also has the potential to reduce the likelihood that the central bank will fall into the time-inconsistency trap. Moreover, since the source of time inconsistency is often found in (covert or open) political pressures on the central bank to engage in expansionary monetary policy, inflation targeting has the advantage of focusing the po-litical debate on what a central bank can do on a sustainable basis—that is, control inflation—rather than on what it cannot do through monetary policy—for example, raise output growth, lower unemployment, or in-crease external competitiveness. How well were the transition economies prepared for the introduction of inflation targeting? In the literature, a relatively long list of requirements 356 Jiri Jonas and Frederic S. Mishkin has been identified that countries should meet if inflation targeting regime is to operate successfully. 3 These requirements include (a) a strong fiscal position, (b) a well-understood transmission mechanism between mone-tary policy instruments and inflation, (c) a well-developed financial sys-tem, (d) central-bank independence and a clear mandate for price stability, (e) a reasonably well-developed ability to forecast inflation, (f) absence of other nominal anchors than inflation, and (g) transparent and accountable monetary policy. It is not possible to say whether a country meets these requirements or not: it is more a question of the degree to which these preconditions are met. On the whole, it could be argued that the three transition countries that adopted inflation targeting, the Czech Republic, Hungary, and Poland, met these requirements to a su ffi cient degree to make inflation tar-geting feasible and useful. 4 All three countries have an independent central bank with a clear man-date to pursue price stability.
eBook - PDFThe Monetary Transmission Process
Recent Developments and Lessons for Europe
- D. Bundesbank(Author)
- 2001(Publication Date)
- Palgrave Macmillan(Publisher)
ÐÐÐÐ (1999a) `Better to Respond to Determinants of Targets than to Targets Themselves', mimeo. ÐÐÐÐ (1999b) `In¯ation Targeting as a Monetary Policy Rule', Journal of Monetary Economics, 43, 607±54. ÐÐÐÐ (1999c) `In¯ation Targeting: Some Extensions', Scandinavian Journal of Economics, 101(3), 337±61. ÐÐÐÐ (1999d) `Monetary Policy Issues for the Eurosystem', Carnegie±Rochester Conference Series on Public Policy, 51±1, 79±136. ÐÐÐÐ (1999e) `Price Level Targeting vs. In¯ation Targeting', Journal of Money, Credit and Banking, 31, 277±95. ÐÐÐÐ (2000a) `Does the P Model Provide Any Rationale for Monetary Targeting?', Working Paper, German Economic Review 1, 69±81. ÐÐÐÐ (2000b) `Open-Economy In¯ation Targeting', Journal of International Economics, Vol. no. 50, 155±83. Svensson, Lars E.O. and M. Woodford (2000) `Indicators for Optimal Policy under Asymmetric Information', mimeo. Sveriges Riksbank (1997), In¯ation Report, September 1997, Stockholm: Sveriges Riksbank. Taylor, John B. (1996) `How Should Monetary Policy Respond to Shocks while Maintaining Long-run Price Stability ± Conceptual Issues', in Federal Reserve Bank of Kansas City (1996). ÐÐÐÐ (1998) `The Robustness and Ef®ciency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank', IIES Seminar Paper, 649. Taylor, John B. (ed.) (1999) Monetary Policy Rules, Chicago, Chicago University Press. Tinsley, P.A. (1975) `On Proximate Exploitation of Intermediate Information in Macroeconomic Forecasting', Federal Reserve Board, Special Studies Paper, 59. Todter, K.-H., and H.-E. Reimers (1994) `P-Star as a Link between Money and Prices in Germany', Weltwirtschaftliches Archiv, 130, 273±89. Vickers, J. (1998) `In¯ation Targeting in Practice: the UK Experience', Bank of England Quarterly Bulletin, 38, 368±75. von Hagen, Jurgen (1995) `In¯ation and Monetary Targeting in Germany', in Leiderman and Svensson (1995).
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