The Bank of Canada should restore the important role of tracking the money supply as a predictor of future inflation and economic performance, according to a major new book on the conduct of monetary policy from the C.D. Howe Institute.
In “Navigating Turbulence: Canadian Monetary Policy Since 2004,” authors Steve Ambler and Jeremy Kronick assess the BoC’s policies from 2004, through the turbulence of the 2008/09 recession, the recovery and up to the current period. Overall, they give the Bank high marks for its stewardship. However, the Bank faces key new challenges posed by the current low-interest rate, low- inflation environment that require response, according to the authors.
“It is our contention,” says Ambler “That the successful conduct of monetary policy in today’s low-interest-rate environment means giving a greater role to money – in particular, a greater role for quantitative easing.” The book points out that the Bank has gradually reduced the attention it pays to money supply, even omitting monetary aggregates from its Monetary Policy Report, depriving it of a valuable metric for measuring economic stability.
The authors also recommend:
- Adopting average-inflation targeting over a longer period than the current twelve-month average of monthly inflation rates. If inflation as measured by the longer moving average is lower than the targeted rate, it would enable the Bank to correct for this deviation by allowing for inflation above target in the short run.
- A predefined mechanism to provide liquidity in cases when markets require emergency funding. The benefits of such a mechanism, including on-going design improvement and transparency for market participants, outweigh concerns over moral hazard.
- A continued focus on the role that housing and household indebtedness have on monetary policy effectiveness, and the importance of Canada’s aging population in understanding how monetary policy is transmitted to the economy.
The authors argue that with lower neutral rates and demographics acting as a brake on the effectiveness of monetary policy, the Bank should continue to think about how to make monetary policy more effective in a low-interest rate, low-inflation economic environment.
is a professor in the Département des sciences économiques at École des sciences de la gestion, Université du Québec à Montréal, a senior fellow of the Rimini Centre for Economic Analysis, and the holder of the David Dodge Chair in Monetary Policy at the C.D. Howe Institute. He is the author of numerous articles in journals such as the Journal of Monetary Economics, the Review of Economics and Statistics, the Journal of Money, Credit and Banking, and the Journal of Economic Dynamics and Control. In addition to many scholarly visiting positions, Steve was on secondment to the Bank of Canada as Special Adviser from September 2006 to July 2007.
is Associate Director, Research, at the C.D. Howe Institute, where he is in charge of the financial services and monetary policy research programs. He has written on a range of topics including the link between demographics and monetary policy, the impact of monetary policy on household debt, and the importance of central bank emergency liquidity facilities. Jeremy has also worked in the international tax department at Deloitte & Touche LLP, and, during his PhD studies, in both the financial stability and international departments of the Bank of Canada.