why_canada_inflation_target

In this regard one important question is what would

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: nchored are people’s inflation expectations. In this regard, one important question is: What would happen to the credibility that the central bank has worked hard to build by keeping inflation and inflation expectations around 2 per cent, if the target was raised to 4 or 5 per cent? Experience shows that moderate inflation can easily creep up to become high inflation if people are afraid that if the central bank can go from 2 to 4 per cent, why not from 4 to 6 per cent and so on. Furthermore, if money loses 4 to 5 per cent (or more) of its purchasing power every year, it may become less effective as a unit of measurement for goods and services and as a store of value. Besides, history shows that higher inflation does not yield any lasting gains in terms of output and employment. So why not aim for a lower inflation rate that better preserves the value of money over time? Finally, given the costs of inflation, it makes little sense to aim for a higher inflation rate year after year just so monetary policy has greater scope to use negative interest rates to prop the economy in case of a severe crisis, which is a rare event. This is a very costly proposition, especially since monetary policy can use other, non-traditional tools to provide stimulus in exceptional circumstances. December 2011 © Bank of Canada 2012...
View Full Document

This note was uploaded on 11/20/2013 for the course ECON 318 taught by Professor Ashbah during the Fall '13 term at Concordia Canada.

Ask a homework question - tutors are online