Robert Amano

Inflation and Growth: A New Keynesian Perspective

The long-run relation between growth and inflation has not yet been studied in the context of nominal price and wage rigidities, despite the fact that these rigidities now figure prominently in workhorse macroeconomic models.

Price-Level Targeting and Inflation Expectations: Experimental Evidence

In this paper, we use an economics decision-making experiment to test a key assumption underpinning the efficacy of price-level targeting relative to inflation targeting for business cycle stabilization and mitigating the effects of the zero lower bound on nominal interest rates.

Monetary Policy and the Zero Bound on Nominal Interest Rates

The recent financial crisis and global economic slowdown have renewed interest in monetary policy options when the policy interest rate is at or near zero. This article examines how different monetary policy frameworks might help to lower the risk and economic cost of such a scenario. The authors present an analytical framework for examining monetary policy at the zero bound, particularly the role of inflation expectations in lowering the real interest rate. The influence of inflation targeting on inflation expectations and how forward guidance or a conditional commitment to future monetary policy may augment traditional monetary policy actions are also examined. The authors then examine recent research on the efficacy of price-level targeting (PLT) at the zero bound, which demonstrates that a credible PLT framework can reduce the likelihood of hitting the zero bound and lessen the economic costs of remaining there. PLT is also found to offer stabilization advantages in "normal" times, although these hinge critically on the degree of credibility of the PLT regime.

Conference Summary: New Frontiers in Monetary Policy Design

Although the current inflation-targeting regime has served Canadians well, sound public policy demands the continuous exploration of possible improvements in the monetary policy framework. At the Bank of Canada's 2009 conference, distinguished scholars from academic institutions and monetary authorities around the world discussed two central questions regarding the design of monetary policy: (i) Would an inflation target lower than 2 per cent lead to better economic outcomes? And (ii) What are the costs and benefits of price-level targeting relative to inflation targeting? The conference agenda included work that shed new light on these two questions. Other work explored the causes of zero-bound episodes and the efficacy of potential policies.

Risk Premium Shocks and the Zero Bound on Nominal Interest Rates

There appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real-world and predictions from quantitative DSGE models. Recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain (optimal) monetary policy.

Next Steps for Canadian Monetary Policy

In 2006, the Bank initiated a research program exploring two alternatives to the current inflation-targeting framework: (i) lowering the inflation target and (ii) shifting to a price-level target. This article discusses progress to date, places the Bank's findings in the context of a broader literature, and identifies avenues for future research. Earlier literature and recent studies at the Bank suggest that an inflation target below two per cent is likely preferable to the status quo, though it is unclear how much lower policy-makers should aim and also how much Canadians would benefit from a shift. With regard to the price-level target, evidence is more mixed, with need for study concerning (i) the target's influence on contracting behaviour and inflation expectations; (ii) strategies for ensuring credibility in the commitment to price-level targeting; and (iii) the Canadian economy's vulnerability to shocks that the literature identifies as particularly detrimental to the target's performance.

Trend Inflation, Wage and Price Rigidities, and Welfare

This paper studies the steady-state costs of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts.

Canadian City Housing Prices and Urban Market Segmentation

The authors provide a detailed empirical analysis of Canadian city housing prices. They examine the long-run relationship between city house prices in Canada from 1981 to 2005 as well as idiosyncratic relations between city prices and city-specific variables.

The Macroeconomic Effects of Non-Zero Trend Inflation

The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices.

Issues in Inflation Targeting: A Summary of the Bank of Canada Conference Held 28-29 April 2005

The Bank of Canada's 2005 conference focused on two critical issues: price-level targets versus inflation targets, and the appropriate level of inflation. Session topics included new methodological approaches to examining the validity of the New Keynesian Phillips curve for Canada; the monetary policy implications of border effects and the financial-accelerator model; the zero lower bound on nominal interest rates; and inflation and welfare in general-equilibrium macroeconomic models. A panel of invited speakers discussed the issues of each session, and two distinguished speakers gave their perspectives on inflation.

Conference Summary: Price Adjustment and Monetary Policy

The 2002 Bank of Canada Conference focused on price adjustment, a critically important issue for monetary policy. Given the acceptance throughout the 1990s and 2000s of the existence of price stickiness in goods or labour markets, or both, and of the important role that monetary policy can play in an economy, the time was right for a conference that would focus on current developments in this area of research, particularly within a Canadian context. Conference papers covering both theoretical and empirical studies explored such themes as sources of the persistence of inflation, forward-looking models of inflation, models of inflation in open economies, the macroeconomic effects of technology shocks, and models of the interaction between wages, prices, and real economic outcomes.

Evaluating the Quarterly Projection Model: A Preliminary Investigation

This paper summarizes the results of recent research evaluating the Bank of Canada's Quarterly Projection Model (QPM).

Credibility and Monetary Policy

A highly credible monetary policy helps to reduce the degree of uncertainty that can surround the objectives of such policy. When the monetary policy pursued by the central bank is credible, the expectations of the public are focused on a target. If the public believes that the Bank will act to bring inflation back to the target, then its expectations will not react so strongly to fluctuating price trends. In turn, fluctuations in inflation, interest rates, output, and employment should be less pronounced than in the absence of such credibility.

The adoption of inflation control as a monetary policy objective by some countries has led central banks to take steps to enhance the credibility of monetary policy. For the Bank of Canada, these include

• the publication of our Monetary Policy Report each May and November, with formal updates each February and August
• the initiation of communications activities across the country
• the use of the overnight interest rate as a short-term operating target
• the issuing of a press release each time the Bank changes its key rates

To date, most of the studies on this topic have concluded that success in keeping inflation within a target range has helped to increase the credibility of Canadian monetary policy. These surveys suggest that expected inflation, which stood at about 5 per cent in 1990, declined to around 2 per cent by 1999 (Chart 1, page 15). Indeed, according to these surveys, for the entire period during which the Bank has had a target range for inflation, expected inflation rates have remained within that range. Inflation expectations have also reacted very little to changes in the total CPI, suggesting that the targets have helped to focus expectations on the target rate and have thus enhanced the credibility of monetary policy (Chart 2, page 16).

One particular study shows that the life of collective wage agreements in Canada has been increasing and that the number of such agreements containing cost-of-living adjustment (COLA) clauses has steadily declined. The authors of this study suggest that this may reflect the greater credibility of Canadian monetary policy (Table 1, page 16). The proportion of mortgages with five-year terms is now higher than it was in the mid-1980s, and many financial institutions have been offering 7- to 10-year mortgages. This also suggests that inflation targets have gained credibility.

Monetary Rules When Economic Behaviour Changes

This paper examines the implications of changes in economic behaviour for simple inflation-forecast–based monetary rules of the type currently used at two inflation-targeting central banks. Three types of changes in economic behaviour are considered, changes that are motivated by developments in monetary and fiscal policy in the 1990s: changes in monetary policy credibility, changes in [...]

Menu Costs, Relative Prices, and Inflation: Evidence for Canada

The menu-cost models of price adjustment developed by Ball and Mankiw (1994;1995) predict that short-run movements in inflation should be positively related to the skewness and the variance of the distribution of disaggregated relative-price shocks in each period. We test these predictions on Canadian data using the distribution of changes in disaggregated producer prices to measure the skewness and standard deviation of relative-price shocks.

A Band-Aid Solution to Inflation Targeting

This paper reviews selectively the literature on exchange rate target zones and corresponding methodologies and examines whether they can be used to analyse the inflation-control problem.

Exchange Rates and Oil Prices

This paper derives analytical gradients for a broad class of regime-switching models with Markovian state-transition probabilities. Such models are usually estimated by maximum likelihood methods, which require the derivatives of the likelihood function with respect to the parameter vector. These gradients are usually calculated by means of numerical techniques. The paper shows that analytical gradients [...]

Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand

In this paper the author examines whether there is significant evidence of the effect of adjustment costs on Canadian labour demand. This is an important question, as sluggish adjustment of labour demand resulting from significant adjustment costs may be one factor that could help explain some of the unemployment persistence found in Canadian data. The [...]

An Empirical Investigation into Government Spending and Private Sector Behaviour

We examine whether there is a significant relationship between government and private consumption for Canada. We derive estimating equations between the two types of consumption under both cointegration and no-cointegration assumptions.

The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation

We examine the ability of the simple linear-quadratic model under rational expectations to explain dynamic behaviour of aggregate Canadian imports. In contrast to authors of previous studies who examine dynamic behaviour using the LQ model, we estimate the structural parameters using the Euler equation in a limited information framework that does not require an explicit solution for the model's control variables in terms of the exogenous forcing variables.

A Further Analysis of Exchange Rate Targeting in Canada

In a recent paper Mercenier and Sekkat (1988) conclude that the Bank of Canada has followed a policy of exchange rate targeting using the money supply. We re-examine their results using a different estimation approach and with different assumptions about the forcing process of the exogenous variables.