I recently remembered a speech that Mark Carney gave as governor of the Bank of Canada (BoC), to the Montreal Board of Trade. In it he discussed the BoC’s position on inflation rate targets and the issues involved in setting them. I wrote about it in my former blog (long deceased). I couldn’t find the article on the BoC website but the BIS had a PDF copy.
At that time in 2011, Carney was governor of the BoC. He later went on to become governor of the bank of England and then moved to the UN to spearhead the climate catastrophe myth. Currently he may be Canada’s finance minister replacing Chrystia Freeland, a fellow WEF Board of Trustees member. I say “may be” because there has been a lot of controversy around the idea. He’s not a member of parliament and I’m not even sure he’s a Canadian resident at this point. He is chairman of the board of the powerful Canadian investment firm Brookfield Asset Management.
I will now present some quotes from the 2011 speech as a basis for discussion. Throughout, he begins by discussing the factors the bank considers in determining the optimal rate of inflation.
The Bank’s Present Position
There is an ongoing debate regarding the “right number” for the inflation target. We have been targeting 2 per cent total CPI inflation, in recognition of the benefits of a slightly positive inflation rate in facilitating economic adjustments, and of the potential operational challenges associated with a lower target rate.
As a reference, the bank defines CPI and gives a (one month) lagging monthly data value for the CPI.
The Argument for Zero Percent or Less Inflation
Targeting an inflation rate lower than 2 per cent is intuitively appealing, since achieving the [2%] target still causes the price level to double roughly every 35 years, which may contribute to money illusion and more generally complicate inter-temporal decision-making. A lower inflation target could also further reduce the costly distortions associated with inflation, such as those stemming from difficulties in distinguishing between absolute and relative price changes, the cost of infrequent price and wage adjustments, and the disincentives to hold money. The Bank’s research has generally found that the further benefits from reducing these distortions imply an optimal rate of inflation closer to, or even slightly below, zero.
The benefits are to the consumer. Their currency is not devalued and prices are more stable due to lack of distortion caused by non-zero inflation. The most important argument is that the bank’s research finds it to be the optimal position. However, the bank’s models don’t agree with each other over projected benefits:
In a perfect world, we would pursue those gains through a lower inflation target. But we do not live in a perfect world. Even the models that we employ to quantify the additional benefits of a lower inflation target – models that aspire to an economist’s utopia – disagree on how material those benefits would be.
I’m not sure what utopia and perfect world have to do with calculations. It seems to me that those should be the bank’s objectives.
The Argument for Two Percent Inflation
Most of the paper is devoted to discussing the rationale for a non-zero inflation rate, specifically 2%. The bank’s primary reason for existence is to try and control the business cycle that creates “boom and bust” periods in all economies (it’s a natural cycle that is characteristic of a complex adaptive system). Their primary method of control is through the manipulation of short-term interest rates, That is called the policy interest rate.
If the economy is slowing such as in a recession, they lower the policy rate making money and therefore loans cheaper. This makes borrowing to spend easier, stimulating economic activity. If the economy is overheated, often causing some inflation, they raise the policy rate to discourage borrowing, thus depressing spending and cooling economic activity.
As Carney notes:
The lower the inflation target, the lower the “equilibrium” nominal policy interest rate will be, and thus the greater the likelihood that shocks will push interest rates to the ZLB [zero lower bound] during “normal” times.
The problem is that at the zero interest rate or ZLB, they cannot lower the policy rate further to stimulate the economy. In recent years, central banks have experimented with negative interest rates and novel economic tools such as quantitative easing (QE). The US Federal Reserve has tried different forms of QE and currency controls, as have Japan and Europe.
Overall, it appears that the more a central bank intervenes, the more distortions that are created in the financial system.
Comments
It seems, therefore, that a zero inflation target benefits the citizen. A two percent target benefits the central bank and their ability to intervene in the economy. With our currencies and economies on the verge of collapse, I have to wonder if we would be better off without central bank economic intervention.
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