Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197870 
Year of Publication: 
2018
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2018-17
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
Subjects: 
Economic models
Inflation targets
Monetary policy framework
JEL: 
E32
E37
E43
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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