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The New Monetary Policy

Implications and Relevance

Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie

Beginning with an assessment of new thinking in macroeconomics and monetary theory, this book suggests that many countries have adopted the New Consensus Monetary Policy since the early 1990s in an attempt to reduce inflation to low levels. It goes on to illustrate that the explicit control of the money supply, which was fashionable in the 1970s and 1980s in the UK, US, Europe and elsewhere, was abandoned in favour of monetary rules that focus on interest rate manipulation by the central bank. The objective of these rules is to achieve specific, or a range of, inflation targets.
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Chapter 11: Reflections on the Bank of Canada's monetary policy framework

Charles Freedman


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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