Time to change how the BoC predicts the future says C.D. Howe

Report says central bank should track money supply

Time to change how the BoC predicts the future says C.D. Howe

The Bank of Canada is missing an important ingredient when making monetary policy decisions according to a new report.

While giving the central bank a generally positive report card, two authors from the C.D. Howe Institute say that the BoC should restore the important role of tracking money supply to help predict future inflation and economic performance.

Steve Ambler and Jeremy Kronick have looked back at BoC monetary policy from 2004, through the turbulent financial crisis of 2008/9, and up to the current day.

They conclude that the low interest rate, low inflation environment that exists today presents the bank with some key challenges.

"It is our contention," says Ambler "That the successful conduct of monetary policy in today's low-interest-rate environment means giving a greater role to money – in particular, a greater role for quantitative easing."

Their findings are presented in a book called "Navigating Turbulence: Canadian Monetary Policy Since 2004," and points out that the Bank has gradually reduced the attention it pays to money supply, even omitting monetary aggregates from its Monetary Policy Report, depriving it of a valuable metric for measuring economic stability.

They believe the BoC – as with many other central banks – are limited in their monetary policy toolbox due to current conditions. But they say there are things it can do to make monetary policy more effective.

Other recommendations
Along with following the money supply, the authors suggest:

  • Adopting average-inflation targeting over a longer period than the current twelve-month average of monthly inflation rates. If inflation as measured by the longer moving average is lower than the targeted rate, it would enable the Bank to correct for this deviation by allowing for inflation above target in the short run.
  • A predefined mechanism to provide liquidity in cases when markets require emergency funding. The benefits of such a mechanism, including on-going design improvement and transparency for market participants, outweigh concerns over moral hazard.
  • A continued focus on the role that housing and household indebtedness have on monetary policy effectiveness, and the importance of Canada's aging population in understanding how monetary policy is transmitted to the economy.

The full findings are in the book from cdhowe.org