Abstract
Recent research has shown that monetary policy based on price-level targeting has several advantages over the traditional inflation targeting method, particularly in times of economic distress. Although several central banks have been coping with the aftershocks of the 2008 financial crisis for prolonged periods, none has adopted price-level targeting. This Commentary reviews some of the reasons for this in the Canadian and American contexts. The relative mildness of Canada’s 2008-2009 recession convinced the Bank of Canada that inflation-targeting can work in troubled as well as tranquil times. Meanwhile, the severity of the US recession led the Federal Reserve to explore several types of unconventional monetary policies, but not price-level targeting. The latter requires a commitment to offset the effects of unexpected inflation on the price level and makes monetary policy history-dependent. The Fed prefers to exercise discretion, and inflation targeting allows central banks to ignore past inflation shocks and engage in fine-tuning of the business cycle. The Bank of Canada shares the Fed’s predilection for discretion in this regard.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call