What's so Special about Inflation Targeting? A Comparative Analysis of Recent Canadian and US Monetary Policy Frameworks

Abstract

In the early 1990s, Canada was one of several countries to adopt an inflation-targeting framework for monetary policy. A noted exception to this group was the United States, where the framework for monetary policy was, as it had been for some time, informed by a dual mandate to maintain both high employment and low and stable inflation. By the late 1990s, the United States seemed to settle, in effect, on an implicit inflation-targeting framework for monetary policy. Nevertheless, whether the preferences of each central bank actually shifted toward minimizing inflation variability, and whether the magnitudes, opportunity costs, and timing of any such shifts were the same for both economies are questions that remain largely unexplored. In this article, I estimate these preferences from 1970 to 2009. Taken together, my results indicate that the Bank of Canada was more inflation averse overall; and both central banks grew more inflation averse over time.