John Murray4
Canada was one of the first inflation targeters in the world. It started
targeting in February 1991, just a few months after the Reserve Bank of
New Zealand introduced this new revolutionary framework for monetary
policy (please see Appendix for the corresponding presentations,
including figures and tables).
Canada’s experience with inflation targeting has been extremely
positive over the past 24 years. It easily exceeded initial expectations,
and has outperformed all of the other monetary policy frameworks tried
(monetary aggregate targeting, nominal GDP growth targets, pegged
exchange rates, full discretion, and so on).
“Flexible inflation targeting,”

 as it is sometimes called, together with
a fully flexible exchange rate regime, has delivered superior monetary
policy performance in Canada before, during, and after the global
financial crisis. It was stress tested and came through with flying colors.
Moreover, it delivered these results in the context of a financial
system that remained solid throughout the challenging 2007–10 period.
Canada, like other countries such as Australia, has demonstrated that
there is no necessary tradeoff between monetary stability and financial
stability. The two are jointly achievable and, indeed, inexorably bound.
The bar for introducing any significant changes to Canada’s existing
framework, therefore, is very high. Although flexible inflation targeting

John Murray is Deputy Governor,

 Bank of Canada.
New Issues in Monetary Policy: International Experience and Relevance for China
may not represent the “end of monetary history” or the best of all
possible regimes, it is the best that we have found so far and has proved
to be remarkably robust and reliable.
Canada’s inflation targeting framework is supported by a joint agreement
between the Bank of Canada and the government of Canada, which sets
the inflation objective and gives the central bank effective independence
for achieving it. Every five years, however, the Bank and the government
are required to renew the terms of the agreement.
This regular renewal is viewed as a positive feature, ensuring that
any new advances in monetary policy thinking are embedded in the latest
framework, and that any desirable adjustments are made on a timely
basis. Although no major changes have been introduced since the early
1990s, when we moved to a 2 percent target, the Bank has a fiduciary
responsibility to continually look for possible improvements.
The last renewal was in 2011, and three fundamental questions
were asked in the run-up to it. Indeed, these are the same questions that
many other central banks are now asking themselves after the crisis. In a
sense, therefore, the Bank of Canada has already provided tentative
The three questions were (1) is 2 percent still the right inflation

 (2) would price-level targeting be better than inflation targeting;
and (3) should our inflation targeting framework be modified to give
more explicit recognition to financial stability concerns.
The short answers to these questions were (1) yes, (2) no, and (3)
no. Although some promising evidence was uncovered suggesting that
there might be a small net benefit associated with moving to a lower
inflation target or moving to a price-level target (or some combination of
the two), the prospective gains were not thought to be worth the risks.
Why change a framework that seemed to be working so well, especially
in such an uncertain environment?

New Issues in Monetary Policy: International Experience and Relevance for China
The idea of giving greater recognition to financial stability concerns
was also rejected. The Bank found that the existing monetary policy
framework had enough flexibility to serve as an effective financial
stability tool when required. No new adjustments to the agreement were
It is important to note in this regard that the Bank viewed monetary
policy as, at best, the third or fourth line of defense in meeting its
financial stability objectives. Individual responsibility on the part of
borrowers and lenders was the first line of defense. Micro-prudential
oversight was the second, followed by macro-prudential measures.
Monetary policy could play a helpful complementary role, at times, but
other, more targeted remedies would generally be preferred.
In short, the research in the run-up to the renewal of the 2011
agreement, coupled with the experience during the crisis, gave a
renewed appreciation for the framework already in place.

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