1. Inflation Targeting: A Canadian Perspective By Prof
Inflation Targeting: A Canadian Perspective By Prof. Angelo Melino – University of Toronoto April 2011
Presenting second half of paper:
Engr. Hasan AlSayegh
5 December 2011
Special Topics in Economic Policy
Dr. Nayef Alshammari

2. Can, should, framework of Bank of Canada be improved?
Currently using: flexible inflation targeting (IT)
Continue to use inflation targeting?
Use alternate: price-level path targeting (PLPT)?
What about condition of Zero Lower Bound (ZLB)?

3. Under Inflation Targeting
Past deviations from inflation target do not affect path of policy rate
There is no “catch-up” or “cool-off” for past price fluctuations
Author confident Bank has not secretly targeted price level despite close correlation
Best explanation: Bank has error-correction behavior built into it to account for interest rate smoothing

5. Under Inflation Targeting
Murchison (2010) states interest rate smoothing IT incorporates many aspects of PLPT
Thus uses some history-dependence to choose path for policy rate to avoid large changes
Since empirical estimates of Bank’s Taylor rule fit better when we allow for interest rate smoothing; it is built into Bank’s ToTEM

6. Price-Level Path Targeting
Set monetary policy according to future price-level, not inflation
Should produce better anchor to reduce medium and long horizon price level uncertainty, still would have tail risk
Masson & Shukayev (2011) argue major events could “reset” price level target path, such as war
May not eliminate long horizon inflation uncertainty due to large shocks to price level

7. Zero Lower Bound
It was thought that ZLB would limit monetary policy, but ZLB events were not expected
April 2009 ZLB occurred: Bank outlined series of actions
Only one used: Conditional commitment to keep policy rate fixed at effective ZLB until end of June 2010
Potential advantages of PLPT appear when economy is at ZLB

8. Target Rate of Inflation
Should it stay at 2%?
Friedman argues that the opportunity cost of holding money by private agents should be equalized to the social cost of producing it.
In the end 2% works

9. Conclusion
Bank of Canada may use additional sources of data to predict future events
Difficult to predict “seismic” economic events, such as events of 2007: Financial stability
Otherwise, system works greatly as is

10. Questions?