Reflections on Bank of Canada Monetary Policy Over the Past Thirty Years
DRAFT: NOT FOR CITATION REFLECTIONS ON BANK OF CANADA MONETARY POLICY OVER THE PAST THIRTY YEARS By Charles Freedman, Scholar in Residence, Economics Department, Carleton University, Ottawa, Canada* (presentation at a “Conference on ‘New’ Monetary Policy: Implications and Relevance” at Downing College, University of Cambridge, Cambridge England, March 19, 2004 and at a Robinson workshop, University of Ottawa, April 2, 2004) “Central bankers are always looking for more reliable guides to the conduct of monetary policy than they have had.” Bouey ( Monetary Policy--Finding a Place to Stand, Per Jacobsson lecture, 1982) A. INTRODUCTION This paper discusses the developments underlying the changes in the monetary policy framework in Canada over the past 30 years. Since the mid-1970s, monetary policy in Canada can be characterized as using, or searching for, a nominal anchor in a flexible exchange rate environment. Basing policy on a nominal anchor was viewed as a way of avoiding systematic policy errors of the sort that led to the breakout of inflation in the late 1960s and the first half of the 1970s. 2 There are four main nominal anchors discussed in the literature -- a fixed exchange rate, a monetary aggregate target, a nominal spending target, and a price inflation or price level target. Of these, only two, a monetary aggregate target and an inflation target, were used in Canada in the period under discussion. Canada operated under a floating exchange rate regime over the entire period. And, to my knowledge, no country has used nominal spending as an official target. In the 1975-82 period, the anchor in Canada was the narrow monetary aggregate M1.
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