Credibility

• November 23, 2003

  An Evaluation of Fixed Announcement Dates

  Bank of Canada Review - Autumn 2003 Nicolas Parent, Phoebe Munro, Ron Parker

  When it launched a new system for regularly announcing its decisions regarding the overnight rate of interest in December 2000, the Bank of Canada had a number of key objectives in mind. These included reduced uncertainty in financial markets, greater focus on the Canadian rather than the U.S. economic environment, more emphasis on the medium-term perspective of monetary policy, and increased transparency regarding the Bank's interest rate decisions. Evidence to date suggests that all four objectives have been met to a substantial degree. Fixed announcement dates have provided regular opportunities for the Bank to communicate its views on the state of the Canadian economy to the public. This has helped to improve understanding of the broad direction of monetary policy and of the rationale behind the Bank's policy decisions although the decisions themselves are not always fully anticipated.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credibility, Financial markets, Interest rates, Monetary policy and uncertainty, Monetary policy implementation
• May 21, 2002

  Inflation and the Macroeconomy: Changes from the 1980s to the 1990s

  Bank of Canada Review - Spring 2002 David Longworth

  Over the last 10 years, the level of inflation has been much lower than in the previous two decades. At the same time, the behaviour of inflation has changed profoundly. By surveying the data and the economic research, the author first examines changes in the variability, growth rates, and behaviour of some of the major macroeconomic variables during the 1980s and 1990s. He then looks at how these changes are linked to a shift in the approach of monetary policy over the period. Lastly, he reviews the economic benefits that these changes have had for Canada.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Business fluctuations and cycles, Credibility, Inflation targets, Inflation: costs and benefits

• Gaining Credibility for Inflation Targets

  Staff Working Paper 2001-11 James Yetman

  In this paper, I consider a simple model in which agents learn about the inflation target of a central bank over time by observing the policy instrument or inflation outcomes. Measuring credibility as the distance between the perceived target and the actual target, an increase in credibility is beneficial to the central bank because it brings the policy consistent with attaining the inflation target closer to that required to attain the output target.

  Content Type(s): Staff research, Staff working papers Topic(s): Credibility, Inflation targets JEL Code(s): E, E5, E52

• The Zero Bound on Nominal Interest Rates: How Important Is It?

  Staff Working Paper 2001-6 David Amirault, Brian O'Reilly

  This paper surveys the literature on the zero bound on the nominal interest rate. It addresses questions ranging from the conditions under which the zero bound on the nominal interest rate might occur to policy options to avoid or use to exit from such a situation. We discuss literature that examines historical and country evidence, and literature that uses models to generate evidence on this question.

  Content Type(s): Staff research, Staff working papers Topic(s): Credibility, Inflation targets, Monetary policy transmission JEL Code(s): E, E3, E31, E5, E52, E58, E6, E61
• August 16, 2000

  The Changing Face of Central Banking in the 1990s

  Bank of Canada Review - Summer 2000 Graydon Paulin

  During the 1990s, central banks in the industrialized countries made important changes in the way they operate. As part of these initiatives, central banks have endeavoured to define a set of best practices, learning from each other in the process. The goal was to improve and adapt the frameworks within which monetary policy is implemented. Clarifying Objectives A clear objective is a necessary starting point for any policy framework. The growing consensus that price stability is the most appropriate objective for monetary policy was perhaps one of the most critical developments of the past decade. Price stability is now universally regarded as the key contribution that monetary policy can make to promote sustainable growth and maximize the level of employment. Central banks also need a clear strategy for achieving their objective. A major development of the past decade was the growing popularity of inflation targets as the numerical focus for monetary policy. Clearly defined inflation targets focus policy on the variable that is directly associated with price stability. The Bank of Canada was one of the first to adopt (in 1991) a set of targets for inflation over a specified time horizon. Accountability Many central banks have acquired greater independence and this, together with the public's desire for more information from key public institutions, has raised the standards for accountability. At the same time, explicit targets provide a clear measure against which to judge the performance of the monetary authorities. Increased accountability also has implications for the overall transparency of the monetary authorities. In sum, central banks have become much more open institutions and are placing greater emphasis on their communications activities. As an example, comprehensive inflation reports have become key communications vehicles for a number of central banks. Many of the changes implemented by central banks stem from the desire to improve the credibility of monetary policy, thus making it easier for monetary authorities to achieve their objectives. Although it is difficult to ascertain the overall effect of the evolving policy framework, it is encouraging that inflation and inflation expectations were at low levels at the end of the 1990s, thus providing a solid base for monetary policy in the future.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credibility, Inflation targets, International topics, Monetary policy framework

• Probing Potential Output: Monetary Policy, Credibility, and Optimal Learning under Uncertainty

  Staff Working Paper 2000-10 James Yetman

  The effective conduct of monetary policy is complicated by uncertainty about the level of potential output, and thus about the size of the monetary policy response that would be sufficient to achieve the targeted inflation rate. One possible response to such uncertainty is for the monetary authority to "probe," interpreted here as actively using its policy response to learn about the level of potential output.

  Content Type(s): Staff research, Staff working papers Topic(s): Credibility, Monetary policy and uncertainty, Potential output JEL Code(s): E, E5, E52, E58

• Monetary Rules When Economic Behaviour Changes

  Staff Working Paper 1999-8 Robert Amano, Donald Coletti, Tiff Macklem

  This paper examines the implications of changes in economic behaviour for simple inflation-forecast–based monetary rules of the type currently used at two inflation-targeting central banks. Three types of changes in economic behaviour are considered, changes that are motivated by developments in monetary and fiscal policy in the 1990s: changes in monetary policy credibility, changes in […]

  Content Type(s): Staff research, Staff working papers Topic(s): Credibility, Monetary policy and uncertainty, Monetary policy framework JEL Code(s): E, E5, E52