HowtoImproveInflationTargetinginCanada.pdf

WP/16/192 How to Improve Inflation Targeting in Canada by Maurice Obstfeld, Kevin Clinton, Ondra Kamenik, Douglas Laxton, Yulia Ustyugova, and Hou Wang IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ? 2016 International Monetary Fund WP/16/192 IMF Working Paper Research Department and Western Hemisphere Department How to Improve Inflation Targeting in Canada Prepared by Maurice Obstfeld, Kevin Clinton, Ondra Kamenik, Douglas Laxton, Yulia Ustyugova, and Hou Wang* September 2016 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Abstract Routine publication of the forecast path for the policy interest rate (i.e. “conventional forward guidance”) would improve the transparency of monetary policy. It would also improve policy effectiveness through its influence on expectations, particularly when there is a risk of low inflation, and the policy rate is constrained by the effective lower bound. Model simulations indicate that a potent macroeconomic strategy, for returning the Canadian economy to potential, combines conventional forward guidance with a fiscal stimulus. As a response to the effective lower bound constraint, and the