How to Improve Inflation Targeting in Canada

44 Pages Posted: 9 Dec 2016

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Kevin Clinton

Government of Canada - Bank of Canada

Ondra Kamenik

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Yulia Ustyugova

International Monetary Fund (IMF)

Hou Wang

International Monetary Fund (IMF)

Date Written: September 2016

Abstract

Routine publication of the forecast path for the policy interest rate (i.e. 'conventional forward guidance') would improve the transparency of monetary policy. It would also improve policy effectiveness through its influence on expectations, particularly when there is a risk of low inflation, and the policy rate is constrained by the effective lower bound. Model simulations indicate that a potent macroeconomic strategy, for returning the Canadian economy to potential, combines conventional forward guidance with a fiscal stimulus. As a response to the effective lower bound constraint, and the decline in the world equilibrium real interest rate, this strategy is preferable to raising the inflation target.

Keywords: Inflation targeting, Canada, Monetary policy, United States, United Kingdom, Central banks, Transparency, Keynesian economics, Econometric models, Canada; inflation targeting; monetary policy; fiscal policy

JEL Classification: E31, E39, E52, E62

Suggested Citation

Obstfeld, Maurice and Clinton, Kevin and Kamenik, Ondra and Laxton, Douglas and Ustyugova, Yulia and Wang, Hou, How to Improve Inflation Targeting in Canada (September 2016). IMF Working Paper No. 16/192. Available at SSRN: https://ssrn.com/abstract=2882630

Maurice Obstfeld (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kevin Clinton

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
613-782-8766 (Phone)
613-782 7508 (Fax)

Ondra Kamenik

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Yulia Ustyugova

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Hou Wang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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