2007 Economic Outlook and Policy Forum
I have just returned from the annual conference of the Canadian Association for Business Economics in Kingston. On Monday evening, we heard from Pierre Duguay, a Deputy Governor of the Bank of Canada. Without specifically mentioning Jimâ€™s Globe column, he suggested that some people mistook the Bankâ€™s intervention in financial markets as a deviation from monetary policyâ€™s exclusive focus on inflation control. He argued that ensuring the financial marketâ€™s overall stability is a function completely separate from monetary policy.
An audience member asked whether inflation targeting could be evaluated in comparison to any historical attempt at employment targeting or real-GDP targeting by central banks. Duguayâ€™s response was that, while monetary policy has side-effects on the real economy, it can only influence nominal values (i.e. inflation) over the long term. This answer seemed to reflect some circularity in the Bankâ€™s reasoning: starting from the premise that monetary policy can only influence inflation, it concludes that monetary policy should target inflation.
On Tuesday morning, Mike McCracken delivered a fantastic presentation that left the Bank view in tatters. He pointed out that positive evaluations of recent monetary (and fiscal) policy are based on comparing current economic conditions (especially the unemployment rate) with the early 1990s recession, which itself resulted from the Bankâ€™s excessively tight monetary policy. He also noted that seniors, who Duguay indicated need very low inflation because they live on fixed incomes, actually receive public pensions that are fully indexed to inflation.
McCrackenâ€™s fiscal forecasts suggest that, as Canadian governments move into a net asset position, they will collect substantial investment income in addition to tax revenues. These sensible forecasts are a useful antidote to the panic that an aging population will destroy fiscal balances by creating labour shortages, driving up healthcare spending and bankrupting public pensions.