Inflation targets

• November 18, 2001

  A New Measure of Core Inflation

  Bank of Canada Review - Autumn 2001 Tiff Macklem

  While the Bank of Canada's inflation-control target is specified in terms of the rate of increase in the total consumer price index, the Bank uses a measure of trend or "core" inflation as a short-term guide for its monetary policy actions. When the inflation targets were renewed in May 2001, the Bank announced that it was adopting a new measure of core inflation. This measure excludes the eight most volatile components of the CPI and adjusts the remaining components for the effect of changes in indirect taxes. In this article, the author discusses the definition of the new measure of core inflation and describes some of its advantages relative to the previous measure. He notes that the new measure has a firmer statistical basis, has a better correspondence with economic theory, and does a better job of predicting future changes in overall inflation. While the new measure has these advantages, the Bank will continue to monitor a broad range of indicators when assessing the likely future path for inflation.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation targets
• November 17, 2001

  Predictability of Average Inflation over Long Time Horizons

  Bank of Canada Review - Autumn 2001 Allan Crawford

  Uncertainty about the level of future inflation adversely affects the economy because it distorts the savings and investment decisions of households and businesses. Since these decisions typically involve planning horizons of many years, the adverse effects from inflation uncertainty can be reduced by adopting a policy framework that makes future inflation more predictable over long time horizons. When the inflation-control target was renewed in May 2001, the agreement affirmed that monetary policy will be directed at moving inflation to the 2 per cent midpoint of the target range over a six-to-eight-quarter horizon. The author describes how this policy commitment increases the predictability of average inflation over periods longer than one year. This relationship is illustrated using the Canadian experience from the inflation-targeting period.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation targets

• 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

• How Rigid Are Nominal-Wage Rates?

  Staff Working Paper 2001-8 Allan Crawford

  This study examines the effect of nominal-wage rigidities on wage growth in Canada using a hazard model and micro data for union contracts. The hazard model is specified in a way that allows considerable flexibility in the shape of the estimated notional wage-change distribution.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation targets, Labour markets JEL Code(s): E, E2, E24, E5, E52, E6, E61

• Downward Nominal-Wage Rigidity: Micro Evidence from Tobit Models

  Staff Working Paper 2001-7 Allan Crawford, Geoff Wright

  This paper uses Tobit models and data for union contracts to examine the extent of downward nominal-wage rigidity in Canada. To be consistent with important stylized facts, the models allow the variance of the notional wage-change distribution to be time-varying and test for menu-cost effects.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation targets, Labour markets JEL Code(s): E, E2, E24, E5, E52, E6, E61

• 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

• On Commodity-Sensitive Currencies and Inflation Targeting

  Staff Working Paper 2001-3 Kevin Clinton

  Two aspects of the recent monetary history of Canada, Australia, and New Zealand stand out: the sensitivity of their dollars to prices of resource-based commodities, and inflation targeting. This paper explores various aspects of these phenomena.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates, Inflation targets, International topics, Monetary policy implementation JEL Code(s): E, E3, E31, E5, E52, F, F3, F31, F4, F42