Thursday, May 21, 2009 0 comments ++[ CLICK TO COMMENT ]++

Bank of Canada considers changing banking policy

Bank of Canada is contemplating changing its policy. It's still in the early stages so nothing may come of it. IANAE (I am not an economist) and, quite frankly, I don't understand what is discussed in the article very well, but I like to cover potential events lurking far off in the distance so I thought others may find it interesting. It's certianly cutting-edge stuff so even if nothing happens now, it may be something that may be implemented 10 or 15 years from now.

The Bank of Canada pulled back the curtain on its internal debate over the future of policy making, revealing an institution that appears to be edging cautiously towards a new approach to setting interest rates.

Policy makers devoted their latest quarterly research publication to inflation targeting, publishing three articles that mostly back a shift to a new policy of “price-level targeting” and a fourth that seeks to damp the enthusiasm by arguing that there are still lots of questions about the largely untested strategy.

Price-level targeting, or PT, differs from the current policy regime of inflation-rate targeting, or IT, by letting prices rise to a certain level over a period of time, as opposed to aiming for a certain rate of inflation.

The Bank of Canada currently raises and lowers its benchmark interest rate to keep the consumer price index advancing at a pace of about 2 per cent a year, which is its mandate from the federal government.

That mandate is up for review in 2011, and Governor Mark Carney is considering suggesting a change, depending on the results of a vigorous research effort that began after the current inflation-targeting approach was renewed in 2006.

PT has “shown some promise in this research, as stabilizing tool and possible source of improved economic welfare,” John Murray, a deputy governor, said in the introduction to the spring edition of the Bank of Canada Review.

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Sweden is the only country that has seriously tried linking interest rates to a future level of prices, and that was in the 1930s.

Proponents of PT argue that setting a goal for price levels over a certain period would enhance stability because consumers and investors would have a clearer idea of how to value purchases or longer term assets.

One positive identified by a team of three Bank of Canada economists led by Allan Crawford is that yields on longer term debt likely would fall under a PT regime, a boon for younger households and governments, both of which are big borrowers.

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