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This paper reviews the existing theoretical and empirical literature addressing the benefits of low inflation. The ultimate goal is to arrive at a set of benefits in which a monetary authority can have genuine confidence. I argue that the current state of economic research—both empirical and theoretical—provides little basis for believing in significant observable benefits […]

This paper analyzes the short-run dynamic process of inflation in Canada and examines whether a systematic variation in the relationship between inflation and output can be detected over time. In the theoretical literature, different models of price-setting behaviour predict that the slope of the Phillips curve will be a function of macroeconomic conditions, implying a […]

In this study, the author uses survey data on inflationary expectations to obtain information about the credibility of Canada's monetary policy. By comparing the differences between the forecasts made by survey participants with the targets set by the Bank of Canada for the 1992-1996 period (the period covered by the study), it was possible to […]

The consumer price index (CPI) is used to measure changes in the price level of consumer goods and services. As an indicator of changes in the cost of living, it is susceptible to various types of measurement biases. This article provides estimates of the size of these biases in the Canadian CPI. It concludes that the rate of increase in the CPI probably overstates the rate of increase in the cost of living by about 0.5 percentage points per year.

A central bank's main concern is the general direction of future inflation, and not transitory fluctuations of the inflation rate. As a result, this paper is concerned with forecasting a simple measure of the trend of inflation, the eight-quarter CPI-inflation rate. The primary objective is to improve the M1-based vector-error-correction model (VECM) developed by Hendry […]

This paper surveys the empirical literature on the benefits of low inflation, emphasizing contributions since 1990. It follows the framework of a section in the Bank's 1990 Annual Report, "The benefits of price stability."

As a guide for the conduct of monetary policy, most central banks make use of a trend inflation index similar to that employed by the Bank of Canada: the CPI excluding food, energy, and the effect of indirect taxes. In addition to their basic reference index, some central banks regularly publish statistical measures of the trend rate of inflation. The method used for producing these measures is, for the most part, based on the hypothesis that extreme price fluctuations generally reflect temporary shocks to the inflation rate, rather than its underlying trend. In this paper, the author offers a broad survey of studies on the measurement of trend inflation that have been published by the Bank of Canada and presents the results of the most recent work on the subject. Particular attention is paid to two statistical measures that the Bank follows more closely than other measures; namely, the CPIX, a price index that excludes eight of the most volatile CPI components, and CPIW, a measure that retains all the components of the overall index but gives a lower weighting to the most volatile.

A monetary authority with the primary objective of price stability has to distinguish between temporary price shocks and persistent shocks to the rate of inflation. A measure of underlying inflation, therefore, has an important role to play as a guideline for monetary policy.

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 recent paper has suggested there might be a trade-off between inflation and unemployment at low inflation rates and this has led some economists to recommend that Canada increase its inflation rate.