This preview shows page 1. Sign up to view the full content.
Unformatted text preview: for it. In times
of severe economic weakness, this extra spending
can prove helpful to the economy.
But with an inflation target of zero, the monetary
authorities lose the option of stimulating the economy
through negative real interest rates because, in this
case, real interest rates too cannot fall below zero.
Preserving the policy option of negative real interest
rates is often cited as the main reason for having a
positive inflation target.1
In addition to the risks associated with the ZLB, the
following two arguments are frequently made for not
targeting an inflation rate closer to zero. 1 This does not mean that monetary policy has no other means of supporting
the economy when the room for lowering interest rates has been exhausted.
In such circumstances, monetary stimulus can be provided through a
conditional statement about the future path of the policy rate and through
two other non-traditional tools—credit easing and quantitative easing. The
Annex in the April 2009 Monetary Policy Report describes these tools and
the principles guiding their use. This text, and other backgrounders on topics related to the Bank of Canada’s work, can be found at:
bankofcanada.ca—search for “backgrounders.” U N D E R S Difficulties in measuring inflation accurately
Difficulties in measuring inflation accurately are one
reason not to aim for zero inflation. As discussed in
the measurement bias in the Canadian CPI, the measured rate of inflation tends to overstate the increase
in the true cost of living by an estimated 0.5 per cent
per year. This means that if the Bank targeted zero
inflation (no change in the measured CPI), it would
in reality be targeting a systematic, even if relatively
small, year-after-year decrease in the true co...
View Full Document