Implications and Relevance
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 11: Reflections on the Bank of Canada's monetary policy framework
11. Reﬂections on the Bank of Canada’s monetary policy framework1 Charles Freedman Central bankers are always looking for more reliable guides to the conduct of monetary policy than they have had. (Bouey, 1982, p. 4) 1. INTRODUCTION This chapter discusses the developments underlying the changes in the monetary policy framework in Canada over the past 30 years. Since the mid-1970s, monetary policy in Canada can be characterized as using, or searching for, a nominal anchor in a ﬂexible exchange rate environment. Basing policy on a nominal anchor was viewed as a way of avoiding systematic policy errors of the sort that led to the breakout of inﬂation in the late 1960s and the ﬁrst half of the 1970s. There are four main nominal anchors discussed in the literature – a ﬁxed exchange rate, a monetary aggregate target, a nominal spending target, and a price inﬂation or price level target. Of these, only two, a monetary aggregate target and an inﬂation target, were used in Canada in the period under discussion. Canada operated under a ﬂoating exchange rate regime over the entire period. And, to my knowledge, no country has used nominal spending as an ofﬁcial target. In the 1975–82 period, the anchor in Canada was the narrow monetary aggregate M1. With the withdrawal of M1 as a target in 1982, the Bank of Canada searched for an alternative anchor for the rest of the decade. In 1991, it introduced inﬂation targeting, which has subsequently...
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