As mentioned before, Deputy Governor David Longworth of the Bank of Canada gave a talk on Inflation Targetting approach as the most sustainable economic policy. While I know there are PowerPoint slides floating out there, I’ve yet to find them. Once I do, I’ll post them here.
Here are my thoughts on the talk and the policy overall.
Inflation Targeting initially involves the central bank stating a target for inflationary growth for the country. They then use macroeconomic tools such as interest rates and monetary tools to influence the economy to produce the desired inflation. In this way, the economy can be controlled and shaped for a specific purpose.
The Canadian approach in Inflation Targeting is to create a slow and sustainable rate of economic growth (at 2% inflation). In this regard, the Bank of Canada has been successful in doing so since the early 90′s, when the policy was implemented. In support of this, Longworth presented many pieces of empircal evidence which indicates that economic growth rate is, indeed, slow and stable. Overall, Longworth presented a very compelling story to illustrate the effectiveness of the system.
Still, one question lingers (one which was asked in the extended Q&A after his talk) and it deals with the rationale behind a desired 2% growth rate. Why did the Bank of Canada choose 2% over other possible small percentages (like 1% or 3%)? In my opinion, Longworth was not able to fully justify this. A 3% rate would offer the same security in “slow and steady growth” but would allow for the country to prosper at a higher rate than other nations. On that particular train of thought, why don’t all industrial countries aim for a 3% (or higher) rate of growth?
If you would like to contribute an answer, feel free to comment below.
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