Two Percent Target: Canadian Monetary Policy Since 1991

David Robinson is an associate professor of economics at Laurentian
University.

For more than a decade the Bank of Canada (BOC) has been pursuing a
simple strategy: to guess what the level of inflation will be two years
from now if it does nothing. Then, if the expected rate of inflation is
too high, it raises interest rates to increase unemployment. Higher
unemployment prevents the expected excess inflation. Over the decade in
question the BOC developed a reputation for being tough on inflation and
Canada achieved a reputation for stable prices.

This prizewinning volume assesses the results of the BOC’s approach.
The authors provide a clear description of the conventional wisdom on
Canadian monetary policy and the Bank of Canada. They conclude that the
BOC is doing about as well as a bank can do. They argue that it can’t
really do anything else as useful, and that it should be left alone. The
two most contentious issues in Canadian monetary policy are glossed
over.

The authors concede that the BOC was “erring almost continuously on
the tight side,” which made the recession of the early 1990s deeper
and longer than necessary. They minimize the social costs of its tough
policy and fail to show that it was necessary. On the other hand, they
present a convincing case for continuing the approach now that it is
firmly established.

David Laidler is one of Canada’s leading macro-economists, and Bill
Robson is an economist for the C.D. Howe Institute, Canada’s leading
business-financed policy think tank. Their conclusions are generally
accepted in the business community and, I would suggest, by much of the
economics profession. Few Canadians may read Two Percent Target, but it
will have a significant effect on Canadian policy.