OPTIMAL MONETARY POLICY CONSIDERATIONS AND OTHER
OUTSTANDING ISSUES
This is not to suggest that the Bank believes that it has conclusively and
permanently answered all of the outstanding issues related to monetary
policy.
Some observers have suggested that encounters with the zero lower
bound (ZLB) on interest rates will be more frequent in the future—
perhaps because of secular stagnation (IMF, 2014). This might favor the
adoption of a higher inflation target rather than a lower one. However,
more frequent encounters with the ZLB might also favor the adoption of
a price-level target or some other type of monetary policy that
incorporates greater history dependence in the central bank’s reaction
function.
Time-inconsistent commitments in the form of price-level targeting,
average inflation targeting, or nominal GDP level targeting are
increasingly attractive solutions in such an environment, conditioning
7
New Issues in Monetary Policy: International Experience and Relevance for China
agents’ expectations in a way that reduces the chances of hitting the ZLB
and minimizing the time that is spent at the ZLB once it has been hit.
Although central banks might be hesitant to adopt any of these
alternative frameworks on a permanent basis, the Bank has considered
using them in an asymmetric fashion and only in emergencies, that is,
switching from inflation targeting to price-level targeting once the ZLB is
reached.
“Breaking the glass” and employing price-level targeting or its
variants could be viewed as a form of unconventional monetary policy—
as a sort of rainy day tool. In fact, several central banks have already
done this indirectly. One could regard quantitative guidance as a form of
back-door, history-dependent policy. Committing to not raising interest
rates until the unemployment rate falls below a certain level and allowing
for some inflation overshooting is really a hybrid form of nominal GDP
targeting. Moreover, it shares many features with what is termed optimal
monetary policy.
The next inflation target renewal date for Canada is in 2016, and
work on it has already begun. Some of the ideas flagged above are at the
center of the research agenda, and others will be added. We intend to
share our results with others along the way, inviting their comments,
suggestions, and criticisms, to make our policy framework even stronger.
