The Costs of Inflexible Indexing: Avoiding the Adverse Fiscal Impacts of Lower Inflation

Abstract

A lively debate is underway about replacing Canada’s 2 percent inflation target with a target for lower inflation or a target for the price level itself when Canada’s inflation-control arrangement expires at the end of 2011. Either change could reduce uncertainty about changes in the value of money over time, and potentially stabilize the economy as well. But such policies may involve costs; a long-standing concern is that rises versus falls in the price level may have different or asymmetrical impacts on the economy.

Keywords: monetary policy, Consumer Price Index (CPI), Bank of Canada, inflation control

JEL Classification: E58, E52, E61, E64