Is the Bank of Canada concerned about inflation or the state of the economy?

Ke Pang and Christos Shiamptanis

Journal of International Money and Finance, 2024, vol. 140, issue C

Abstract: This paper examines the behaviour of the Bank of Canada (BoC) since the adoption of the inflation-targeting framework. We use a newly released dataset that contains quarterly vintages of real-time historical data and BoC staff forecasts, and we present the following novel empirical findings. First, the BoC appears to have increased its focus towards the state of the economy. Over the sample period, we find that the response to inflation weakens and the response to the real economy rises substantially. Second, the BoC appears to be responding to an alternative inflation measure: persistent expected future inflation deviations. We find that transitory or past inflation deviations do not elicit a response. Third, the BoC appears to respond asymmetrically to positive and negative persistent expected future inflation deviations. We find an aggressive response to positive inflation deviations that declines over time in favour of a modest response to negative inflation deviations, suggesting that persistent expected future inflation overshoots and undershoots elicit different responses and these responses are time-varying.

Keywords: Asymmetric monetary policy; Expected inflation deviations; Real-time data and forecasts; Forward looking Taylor rule (search for similar items in EconPapers)
JEL-codes: E42 E43 E52 E58 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:140:y:2024:i:c:s026156062300178x

DOI: 10.1016/j.jimonfin.2023.102977

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