(October 17 – 17:25 ET) – Bank of Canada governor Gordon Thiessen spoke to the Faculty of Social Science at the University of Western Ontario this afternoon about the theory and practice of monetary policy in Canada. His speech contained nothing that should move markets, or indicate the bank’s intentions.
Thiessen says there has been a fundamental transformation in the way monetary policy is conducted in Canada, driven primarily by the interaction of experience and economic theory. “One of the most important lessons that monetary authorities have learned through this process of analysis and experimentation is that there is no virtue or advantage in vague policy objectives and complex operating procedures. What is needed to get the job done are one clear objective and one simple instrument.”
Thiessen traced the development of policy from the bank’s creation in 1935 through the dominance of Keynesian thinking, the work of Milton Friedman, the rise of the Phillips curve, and the work of last year’s Nobel Prize winner in economics, Robert Mundell. The introduction of the goal of price stability and the setting of inflation targets was also covered. “Inflation-control targets have had a major impact on the Bank and on the way it conducts monetary policy. Perhaps the most important influence has been to encourage greater transparency. With an explicit target for inflation and the central bank accountable for achieving that target, there is a strong incentive to be as forthright as possible about any trends in the economy likely to influence inflation, the decisions policy-makers may have to take to achieve the targets, the shocks that may temporarily push inflation outside the target range, and the pace at which inflation can be returned to the target.”
Thieseen explained that the bank now has one job, one way of achieving its goal and it understands the benefit of working with the market rather than surprising it. He said his successor will be responsible for pushing monetary policy further.
-IE Staff