Thursday 9 December 2021

Chronic confusion and disappointment

Looks like Canada is facing similar pressures around central banking and mission creep. Here's Steven Ambler, Jeremy Kronick and William Robson in Canada's Financial Times:

A more overtly inflationary recommendation is to add something else – usually a labour-market indicator, such as the unemployment rate, to the Bank’s framework. Proponents often argue that inflation control hurts jobs and, more specifically, that central banks have been too quick to tighten before the economy reaches full employment. But unemployment in Canada has been lower and less volatile since the two-per cent target came into force. And the blow-out jobs report last week just underlines the problem of determining what full employment actually is, especially after a major disruption like the pandemic.

As for other goals, such as reducing inequality and or slowing global warming, we need to keep people’s expectations about monetary policy in line with what it can actually do. Monetary policy is about short-term interest rates, the growth of money and credit, the pace of spending, and the results of all this for inflation. While the Bank must assess how inequality and global warming impact its ability to hit the inflation target, asking it to target the price of assets held mainly by the wealthy or favour credit for some industries at the expense of others will lead to chronic confusion and disappointment.

The two-per cent inflation target has been a signal success in Canadian economic policy for a quarter century. We know it is achievable, and with inflation currently running close to five per cent, we are getting a timely reminder that alternatives can easily be worse. It is time to reassure Canadians that their government and central bank are committed to low and stable inflation in the future.

Emphasis added.

Nick Rowe quips:


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