Tuesday, November 28, 2006

The BoC's big obstacle

The Canadian press is giving a lot of ink to the possibility of the Bank of Canada setting a lower inflation rate in the future and, further, the possibility that it may favour price targeting. Of course, no action would happen until 2011 if it happened at all, but with the next renewal due this December, the subject is a popular one.
If the public doesn't "get it" though, is price targeting worth pursuing? From The Toronto Star:
Inflation target under review (Nov.27)
[UWO prof David Laidler] acknowledged it would be “risky” to change the rules without careful preparation of the public, but proposed a one per cent target, stressing that “a two per cent inflation rate is a far cry from anyone’s (or at least any retiree’s) idea of price-level stability.”
The Bank of Canada raises another, more complex, possibility: targeting a price level. This would mean that periods of above-target inflation — which under the current policy are written off while the bank seeks merely to return to the two per cent level — would have to be offset by periods of inflation below the target to produce stable long-term prices. The bank’s document acknowledges “the difficulty that might be associated with explaining price-level targeting to the general public.”
Officials intend to complete their research “well before 2011 so as to ensure sufficient time for open discussion of the results and their implications.”

I'm beginning to think that one of the biggest obstacles associated with price targeting is the public's confusion over what it actually is and how it would work. Ben Bernanke and Allan S. Blinder could probably write a book or two on this subject by now after Bernanke proposed “the explicit numerical definition for the price stability objective” (I've blogged about the confusion they've both seen here). Bernanke's proposal is something like inflation targeting; still, I think his experience with proposing a new regime, as I wrote about in the link above, says a lot.


amphimacer said...

Not being an economist, I'm sort of out of the loop on this, except for what I read in the papers (I took introductory economics, but it seemed -- and still seems -- to me to be too far from reality as we know it for me to continue without exploding frequently). But the big difference seems to be that price targeting is, in effect, cumulative, while targeting the inflation level is not. This is, in the longer term, more effective at halting inflation, but it's also contrary to one of the tenets of the Friedmaniacs and other bashers of the planned economy: it's part of a planned economy.
I think it's time people admitted that they will plan an economy around their "free market" ideals, and object to planning an economy only if it involves some socialistic, communistic component. The trouble with the Soviet Five Year Plans turns out not to be the fact that Plans were made, but that the Plans were no good. Are these?

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