Choosing the Best Monetary Policy Framework for Canada

It is a pleasure to speak here at the Max Bell School of Public Policy.

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WHEREAS it is desirable to establish a central bank in Canada to regulate credit and currency in the interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada.

Preamble, Bank of Canada Act

It is a pleasure to speak here at the Max Bell School of Public Policy. As many of you know, Bell was a shrewd business person and media mogul during an era that witnessed the Great Depression, the Second World War and Canada joining the world stage. He was also dedicated to public affairs and the greater good of Canadians.

It is therefore fitting that I am here today to add to a conversation about the best monetary policy framework for Canada. The Bank of Canada opened its doors during Bell’s era, in 1935, to support the economic and financial welfare of Canada. What that has meant in practice has naturally changed quite a lot over the years to keep up with a complex and evolving world.

For the last quarter of a century, the Bank’s monetary policy framework has been focused on targeting low and stable inflation, in the context of a flexible exchange rate. This is not just the Bank’s goal, it is shared with the federal government—both acting on behalf of the people of Canada. This is formalized in what is called the inflation-control agreement. It is renewed every five years and has been supported by six prime ministers of different partisan stripes. We are working on the next renewal, set for 2021, with our Finance colleagues.

Having a formal agreement with a democratically elected government supports the credibility of our shared objective. It gives the Bank the independence it needs to pursue that objective. The Bank has used this independence wisely. We have delivered low and stable inflation—pretty darn close to our target of 2 per cent on average over the last 25 years. We have managed to do this even in the face of big economic shocks, such as the run-up of oil prices in the mid-2000s and the plunge four years ago, and the global financial crisis in between.

Yet even a well-functioning monetary policy framework deserves an open-minded discussion, particularly in the post-crisis world we live in. There are a couple of challenges facing our framework that mean it may not serve the economic and financial welfare of Canada in the future as well as it has in the past.

This is important. The objectives that we set and how we go about achieving them have real implications for people in their everyday lives. This could not be more obvious than it is today, as interest rates rise to more normal levels. This is resulting in difficult adjustments in the finances of many. At the same time, the Bank’s actions are supporting a stable economic environment for even more households.

My remarks today are intended to spark a good discussion. I will focus on two public policy questions that are shaping our work plan leading up to the 2021 renewal:

  1. What alternative frameworks might do a better job than inflation targeting, if any? We know there are contenders, but we have not conducted a full horse race since the 1980s.
  2. Regardless of whether we stick with inflation targeting or move to something new, what supporting policies can we bring to the table? We know the Bank of Canada’s policy toolkit, along with other public policies, are critical to reinforcing our shared objectives.

Our research work will drill down in these areas, and will be informed by extensive engagement outside the Bank. Our annual economic conference this year, held a couple of weeks ago, was on this subject and yielded a very productive debate. And, our research is being published as we go, so Canadians can follow our progress.

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