David Longworth served as a Deputy Governor of the Bank of Canada from April 2003 until his retirement from the Bank in March 2010. As a member of the Bank’s Governing Council, he shared responsibility for decisions with respect to monetary policy and financial system stability, and for setting the strategic direction of the Bank.
Mr. Longworth joined the Bank of Canada in 1974 in the Special Studies Division of the Research Department. In 1984, he was appointed Assistant Chief of the Special Studies and Balance of Payments divisions in the International Department and was named Deputy Chief of the department the following year. In 1987, Mr. Longworth moved to the Department of Monetary and Financial Analysis to become Research Adviser and later, Chief. He was appointed Chief of the Research Department in 1996 and Adviser to the Governor in 2000.
Born in Edmonton, Alberta, Mr. Longworth received a bachelor of science degree in mathematical statistics in 1973 and a master’s degree in economics in 1974, both from the University of Alberta. He also studied at the Massachusetts Institute of Technology, where he graduated with a PhD in economics in 1979.
Thank you for inviting me here today. It is a pleasure to be with you. This afternoon, I would like to talk about liquidity and the role of the Bank of Canada.
The Bank's mandate is to promote Canada's economic and financial well-being. Clearly, this is an important mandate, and we are determined to demonstrate excellence as we work to fulfill it.
With your professional interests in foreign exchange, money markets, capital markets, and derivatives, I'm sure the past year and a half has been exciting and interesting – if those are the right words. We've been living through a period of astonishing financial turbulence, historic marketplace losses, and serious threats to financial stability.
The financial turbulence over the past year has been costly and difficult for many individuals and financial institutions; it's been challenging for policy-makers; and it's had implications for the overall economy.
Today, I'd like to discuss some of the crucial issues that we have been dealing with during this period. I'll begin with a brief overview of some key events that have led to the turbulence that continues to upset financial markets and that greatly contributed to the remarkably wide credit spreads that we now witness.
Sound financial investment is important to individuals, to firms, and to society as a whole. By definition, investment is forward looking, and thus our future financial well-being is shaped by the soundness of the investment decisions we make today.
Inflation targeting, a stable macroeconomic environment, and an average growth rate for potential output that is not expected to vary much in the next several years all help households, businesses, and governments in their medium-term economic and financial planning. Several simple rules of thumb can be usefully employed in this planning. Specifically, inflation targeting has maintained most major measures of inflation quite close to the target midpoint on average over a number of years. Combined with a clear fiscal framework, this has contributed to a more stable macroeconomic environment in which output varies less around its potential level. Potential output growth is expected to average around 3 per cent over the next several years.
In light of these factors and historical relationships, labour income, profits, and consumer spending will likely grow, on average, by about 5 per cent over the medium term. Real and nominal long-term interest rates should also continue to be stable, with real 30-year yields varying around 3.5 or 4.0 per cent, and nominal yields varying around 5.5 or 6.0 per cent.
Central banks must cope with considerable uncertainty about what will happen in the economy when formulating monetary policy. This article describes the different types of uncertainty that arise and looks at examples of uncertainty that the Bank has recently encountered. It then reviews the strategies employed by the Bank to deal with this problem.
The other articles in this special issue focus on three of these major strategies.
Over the last 10 years, the level of inflation has been much lower than in the previous two decades. At the same time, the behaviour of inflation has changed profoundly.
By surveying the data and the economic research, the author first examines changes in the variability, growth rates, and behaviour of some of the major macroeconomic variables during the 1980s and 1990s. He then looks at how these changes are linked to a shift in the approach of monetary policy over the period. Lastly, he reviews the economic benefits that these changes have had for Canada.
