David Dodge, Governor of the Bank of Canada, spoke over the weekend about the value of creating a credible anchor for monetary policy by targeting inflation.

Dodge delivered his remarks at a joint session of The American Economic Association and the North American Economics and Finance Association in Atlanta over the weekend. Dodge described how the government and the central bank are on the same wavelength in terms of the objective of policy. “The successful implementation of a monetary policy aimed at low, stable, and predictable inflation and a fiscal policy aimed, in most circumstances, at running a small surplus with the goal of bringing about a significant decline in the debt-to-GDP ratio has enhanced the credibility of both policies,” he said.

Focusing on inflation in monetary policy decisions was the theme of his talk. “The purpose of setting out formal targets is to provide a clear indication of the downward path for inflation over the medium term so that firms and individuals can take this into account in their economic decision-making. The inflation targets also provide information on the specific objectives to which the monetary policy actions of the Bank will be directed in the period ahead and through the medium term,” he said. “This information should make the Bank’s actions more readily understandable not only to financial market participants but also to the general public and should provide a better basis than before for judging the performance of monetary policy.”

Dodge said that targeting inflation has improved the business-planning environment for close observers of the economy, businesses and those bargaining over wages. “It promotes a much greater degree of confidence and understanding than monetary targets or a vaguely expressed desire for price stability ever did. People care about inflation. Therefore, when the focus of policy is on inflation itself and when accountability is in terms of a specific measure of inflation, the public can see and interpret both what the central bank aims to do and what it actually accomplishes.”