Moving Monetary Policy Forward: Why Small Steps - and a Lower Inflation Target - Make Sense for the Bank of Canada

Abstract

The current monetary policy agreement between the Bank of Canada and the Department of Finance is set to expire at the end of 2011. Among the policy options under consideration is the adoption of either a lower inflation target or a switch to price-level targeting. The recent financial crisis provided a costly reminder that price stability does not necessarily guarantee financial stability, and the Bank’s post-2011 mandate might include a role for asset market stability. This Commentary offers an overview of the policy options now being contemplated for the renewal of the monetary policy framework in 2011 and addresses some of the more technical issues related to the post-2011 monetary policy framework.

Keywords: Monetary Policy, Bank of Canada, inflation targeting (IT), price-level targeting (PLT)

JEL Classification: E58