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Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced Jurisdictions

Author

Listed:
  • Robert Amano
  • Thomas J. Carter
  • Lawrence L. Schembri
Abstract
A growing number of advanced economies with monetary policy frameworks that involve inflation targeting have adopted formal processes of review and renewal. These allow policy-makers and other stakeholders to assess the current framework’s performance to date, explore the merits of potential alternative frameworks and reach decisions about how best to enhance design and implementation. In this paper, we argue that well-governed review and renewal processes can contribute importantly to the success of a monetary policy framework: (1) they help to adjust the framework in response to experience, theoretical developments and changes in the economy; and (2) they enhance the legitimacy and credibility of changes made to the framework. However, as these processes involve inputs from the government or legislature, they also create potential for tensions regarding central bank independence. We use an international comparison to show that these considerations have been balanced in different ways across countries and time, with a spectrum running from relatively technocratic processes to ones more closely linked to the political cycle. We also highlight several unique aspects of the modern review and renewal experience in Canada, where renewals of the Bank of Canada’s joint inflation-control agreement with the government have regularly been preceded by in-depth framework reviews, each involving a large amount of original research and significant levels of transparency.

Suggested Citation

  • Robert Amano & Thomas J. Carter & Lawrence L. Schembri, 2020. "Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced Jurisdictions," Discussion Papers 2020-7, Bank of Canada.
    • Handle: RePEc:bca:bocadp:20-7
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    References listed on IDEAS

    as
    1. Andersson, Fredrik N. G. & Jonung, Lars, 2018. "Lessons for Iceland from the Monetary Policy of Sweden," Working Papers 2018:16, Lund University, Department of Economics.
    2. Laurence M. Ball, 2014. "The Case for a Long-Run Inflation Target of Four Percent," IMF Working Papers 2014/092, International Monetary Fund.
    3. Andersson, Fredrik N. G. & Jonung, Lars, 2017. "How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden," Working Papers 2017:2, Lund University, Department of Economics.
    4. Ben S. Bernanke, 2005. "Nomination hearing: testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, November 15, 2005," Speech 152, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Darracq Pariès, Matthieu & Notarpietro, Alessandro & Kilponen, Juha & Papadopoulou, Niki & Zimic, Srečko & Aldama, Pierre & Langenus, Geert & Alvarez, Luis Julian & Lemoine, Matthieu & Angelini, Elena, 2021. "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement," Occasional Paper Series 267, European Central Bank.
    2. José Dorich & Rhys R. Mendes & Yang Zhang, 2021. "The Bank of Canada’s “Horse Race” of Alternative Monetary Policy Frameworks: Some Interim Results from Model Simulations," Discussion Papers 2021-13, Bank of Canada.
    3. Robert Amano & Marc-André Gosselin & Kurt See, 2021. "Exploring the potential benefits of inflation overshooting," Staff Analytical Notes 2021-16, Bank of Canada.

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    More about this item

    Keywords

    Central bank research; Inflation targets; Monetary policy framework;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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