On the other hand the recent experience in many

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Unformatted text preview: how much lower the target could be. On the other hand, the recent experience in many advanced countries, including Canada, has made it clear that the risks and costs associated with the ZLB must now be taken more seriously. ZLB considerations have shaped the Bank’s perspective on the main issues studied for the 2011 renewal of the inflation-control target, including the potential net benefits to the economy from an inflation target lower than 2 per cent. On this score, the Bank’s latest findings suggest that such benefits may be greater than previously estimated, strengthening the case for a lower inflation target. However, research and the international experience have also highlighted the sizable risks associated with the ZLB. Accordingly, the Bank has concluded that before the benefits of a lower inflation target can be confidently pursued, ways must be found to limit the probability of hitting the ZLB and to deal with it more effectively when this happens.4 Concerns about the ZLB have also renewed calls from some analysts for a target higher than the 2 per cent the Bank of Canada and other major central banks are currently pursuing. However, there are important arguments against a higher inflation target. 4 See also Monetary Policy backgrounder and Bank of Canada. 2011. Renewal of the Inflation-Control Target: Background Information. (November). 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 Why not a higher inflation target of 4 or 5 per cent? Many of the costs of inflation stem from its unpredictability. If inflation could be kept at 4 or 5 per cent, these costs might not be as great. But experience shows that the higher inflation is, the more uncertain and volatile it tends to be, and the less a...
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