Two Types of (Slight) Flexibility in Bank of Canada Projections, 2003–2019

Gregor Smith

Canadian Public Policy, 2019, vol. 45, issue 3, 366-376

Abstract: Central bankers and other economists sometimes describe the inflation targeting practiced in Canada as flexible. This flexibility refers to deferring the planned return of the Consumer Price Index (CPI) inflation rate to the 2 percent target. In this article, I outline two ways to measure flexibility: by seeing whether the forecast for future inflation varies with either (1) current values of inflation or output growth or (2) the forecast for future output growth. The latter correlation would suggest that the Bank of Canada aims to stabilize output growth in addition to stabilizing the inflation rate. I describe how to detect evidence of these two types of flexibility in the Bank of Canada's own forecasts (also known as projections) from its quarterly Monetary Policy Report. However, there is little sign of economically significant flexibility between 2003 and 2019.

Keywords: monetary policy; forecasts; inflation targeting (search for similar items in EconPapers)
Date: 2019
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