European Parliament Library

Why is Canada’s Price Level So Predictable?, Vladimir Klyuev, Heesun Kiem, Ondrej Kamenik, Douglas Laxton

Abstract
One of the pioneers of inflation targeting (IT), the Bank of Canada is now considering a possibility of switching to price-level-path targeting (PLPT), where past deviations of inflation from the target would have to be offset in the future, bringing the price level back to a predetermined path. This paper draws attention to the fact that the price level in Canada has strayed little from the path implied by the two percent inflation target since its introduction in December 1994, and has tended to revert to that path after temporary deviations. Econometric analysis using Bayesian estimation suggests that a low probability can be assigned to explaining this behavior by sheer luck manifesting itself in mutually offsetting shocks. Much more plausible is the assumption that inflation expectations and interest rates are determined in a way that is consistent with an element of PLPT. This suggests that the difference between IT as it is actually practiced (or perceived) and PLPT may be less stark than what pure theoretical constructs posit, and that the transition to a fullfledged PLPT regime will likely be considerably easier than what was previously thought. The paper also shows that inflation expectations are a major driver of actual inflation in Canada, which makes it easier to keep inflation close to the target without large output costs
Table Of Contents
Contents; I. Introduction; II. Differences between IT and PLPT in theory and in practice; Figures; 1. Inflation rate and the deviation of the price level from constant growth path after one-period shock under inflation targeting and price level targeting; 2. Evolution of CPI in Canada since introduction of the 2 percent target; 3. Inflation and deviation of price level form constant inflation path; 4. Optimal transition of inflation to the target, with and without uncertainty; III. Model; IV. Estimation; Tables; 1. Priors of model parameters; 2. Estimation results; V. Conclusions; References
Language
eng
Literary Form
non fiction
Note
Description based upon print version of record
Physical Description
1 online resource (40 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781462381036

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