How to Improve Inflation Targeting in Canada

Maurice Obstfeld, Kevin Clinton, Ondrej Kamenik, Douglas Laxton, Yulia Ustyugova and Hou Wang

No 2016/192, IMF Working Papers from International Monetary Fund

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: WP; inflation target; exchange rate; output-inflation trade-off; rate of inflation; policy rate; Canada; inflation targeting; monetary policy; fiscal policy; interest rate path; inflation expectation; Inflation; Central bank policy rate; Real interest rates; Output gap; Global (search for similar items in EconPapers)
Pages: 43
Date: 2016-09-26
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Citations: View citations in EconPapers (10)

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