The History of Inflation Targeting and the Case for Maintaining the Status Quo

Michelle Alexopolous argues that the evidence in favour of the various alternatives is not yet strong enough to justify the risks involved in abandoning the status quo.

The Bank of Canada's inflation-targeting record can hardly be described as an abject failure: inflation has fluctuated in a narrow band around its two per cent target for almost three decades. While this record of success does not justify complacency—especially in today's extraordinary circumstances—it does set the bar relatively high when contemplating alternatives. Moreover, there would be significant challenges to be overcome during the transition to another mandate, communications not least among them. Professor Alexopolous argues that the evidence in favour of the various alternatives is not yet strong enough to justify the risks involved in abandoning the status quo. Instead, she argues that more thought should be given to exploring how unconventional fiscal policy could coordinate with unconventional monetary policy during a crisis.

Professor Claus welcomes the suggestion to look more closely at the role of fiscal policy, but believes that the target rate of inflation should be increased so that it is more in line with consumer expectations.

The History of Inflation Targeting and the Case for Maintaining the Status Quo with Michelle Alexopoulos and Edda Claus

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This paper is based on a presentation given at the Max Bell School's Choosing the Right Target conference, where options for the Bank of Canada's mandate renewal were explored.

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