Canada's World-Class Inflation Fight

Canada currently aims to keep inflation in a band of 1% to 3%, aiming directly for the 2% mid-point. Since inflation targeting was first adopted by the Reserve Bank of New Zealand in 1990, a total of eight industrial countries and 13 emerging-market countries have now become inflation-targeters. Switzerland, which has had a target only since 2000, ranked first with actual inflation deviating from the target by only 0.38 percentage points on average, the United Kingdom came second with a 0.66 deviation and Canada third with a 0.88 deviation. For all countries, the performance was solid, with two-thirds of the deviations smaller than one percentage point, said the central bank's Marc-Andre Gosselin. The report did not look at the United States, which does not have an inflation target. Mr. Gosselin found the higher the inflation target and wider the inflation-control range, the more volatile both the inflation and economic output. And although many banks have moved to greater transparency --publishing minutes and voting records -- greater openness may not improve the accuracy of predicting inflation. "We find that central banks publishing the minutes or voting records of their MPC [monetary policy council] meetings tend to miss their objective more than those that do not," Mr. Gosselin wrote. "This could be because minutes and voting records sometimes expose disagreements within the MPC thereby complicating communications with the public." The Bank of England may be the exception here, as it does publish minutes and has a good record. The Bank of Canada does not publish minutes. While less inflation is generally considered better and various commentators have suggested the bank consider dropping the mid-point farther -- say to 1.5% -- to further stem the corrosive impact of inflation on the value of money, another study in the review concludes inflation that is too low may restrict a central bank's ability to respond to shocks such as a recession. ... http://www.nationalpost.com/scripts/story.html?id=309161

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