INFLATION TARGETING AND THE ECONOMY: LESSONS FROM CANADA'S FIRST DECADE

Charles Freedman

Contemporary Economic Policy, 2001, vol. 19, issue 1, 2-19

Abstract: Inflation targeting has become the centerpiece of the monetary policy framework in a number of industrial countries and emerging economies. The first part of this article examines the Canadian experience with inflation targeting since its introduction in early 1991 and various issues that require resolution in establishing such a framework. It also examines the way inflation targets deal with demand, price, and productivity shocks. The second part focuses on Canada's economic performance during the 1990s. Factors other than monetary policy ‐ most notably private sector restructuring and the fiscal situation in the first half of the decade ‐ played an important role in the sluggishness of the recovery from the recession of 1990–91. Trend growth in Canada during the 1990s was lower than in earlier periods and than U.S. trend growth over the same period. The article examines the role of such factors as productivity growth and participation rates in explaining the differences. I conclude that a good monetary policy is necessary but not sufficient for good economic outcomes.

Date: 2001
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