Evidence of meeting #29 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was target.
A recording is available from Parliament.
Conservative
The Chair Conservative James Rajotte
I call the meeting to order. This is the 29th meeting of the Standing Committee on Finance.
I want to thank all our guests for coming in today.
Pursuant to Standing Order 108(2), we're very pleased to have five presenters here for our study of the inflation-targeting framework of the Bank of Canada.
From Bentley University, we have a professor of economics, Mr. Scott Sumner, by video conference.
Conservative
The Chair Conservative James Rajotte
We will endeavour to fix a technical problem.
We also have a professor from the Department of Economics at the University of Ottawa, Mr. Mario....
Professor Mario Seccareccia Department of Economics, University of Ottawa, As an Individual
Seccareccia.
Conservative
The Chair Conservative James Rajotte
Thank you very much.
From the Canadian Auto Workers Union, we have Mr. Jim Stanford, economist. Thank you for being with us.
From McGill University we have David Dodge, chair in monetary policy, C.D. Howe Institute, and associate professor of economics Mr. Christopher Ragan. And from TD Bank Financial Group, we have Mr. Craig Alexander, the senior vice-president and chief economist.
I'm going to start with Mr. Seccareccia and your presentation. You can take between five and seven minutes for your opening presentation. That will leave us a lot of time for members' questions.
Prof. Mario Seccareccia
I'll do my best.
Thank you, Mr. Chair, for inviting me here. I'm quite privileged and honoured to be among my fellow economists, especially here.
I read through the background information, the report that was circulated on the net, regarding the renewal of inflation targeting by the Bank of Canada. From the beginning, from that first page, they refer to the benefits of the inflation targeting regime we've had since 1991. They assert, basically, that it has delivered on a number of things pertaining to what is fundamental here, which is that we now have a low, stable, and predictable inflation rate, which we didn't have earlier.
Now, what were these benefits? One, they argue, is that we have had a lower and predictable inflation environment here, which has made it possible for consumers to manage their finances with greater certainty about the future power of their savings and income. Second, interest rates have also been lower, in both nominal and real terms, across a wide range of maturities, as a result of this inflation targeting. Third, we have had lower and stable inflation, which has helped to encourage more stable economic growth and lower and less variable unemployment.
If you look at these, I would argue that these sorts of benefits are not as tangible as they suggest they are. Let's start with the first one. For one thing, it is clear to me that the inflation rate, yes, has been more stable. But we've also witnessed during this whole era a decline in the savings rate, which practically went to zero in Canada, and associated with that, growing household indebtedness.
In the balance-sheet kind of recession we're facing right now, what households can in fact look towards is merely stability in the real burden of their debt, not stability in their savings. They don't have as much as they had when we first began with this regime. So one question is simply whether this regime has actually delivered on that.
Even more importantly, if we look at what actually went on over the last few years, especially with pension funds and all of that, they've gone through some very serious haircuts. Surely when we talk about stability of savings, we're trying to figure out what is exactly in the mind of the Bank of Canada.
Second, if we look at these lower real interest rates, the really sharp decline actually occurred during two periods. We didn't really go through a recession in Canada, but we did in the United States, in the 2000-2001 period, when we witnessed a fairly significant drop in interest rates. Obviously, during the last financial crisis here, in 2008-2009, we again saw a really deep drop in interest rates, both nominal and real. Hence, in fact one could argue that real interest rates fell much less, initially, let's say, because of the inflation targeting. While interest rates did fall eventually, we've really patterned ourselves along the lines of what has been going on continentally and even in the world economy at large, rather than just as a result of somehow, because we've had inflation targeting, these interest rates fell dramatically as a result of it over the last 20 years.
Third, with regard to the issue of actually encouraging economic growth, once again, I think it depends on which period, precisely, one is talking about. While we did have more growth, let's say, prior to the financial crisis, I would argue that with inflation targeting, the Bank of Canada did not as willingly try to combat unemployment as it would have if unemployment were actually, let's say, a variable in their reaction function.
Moreover, contrary to why inflation targeting was in fact actually sold to Canadians originally, I'm old enough to remember the 1980s and early 1990s, when they were discussing why we should have inflation targeting. If you go back to John Crow, for instance, at that time there was the idea of having some sort of zero inflation target. The reason given was essentially that it would enhance productivity growth, that it would enhance efficiency in the economy and would increase productivity growth. Well, if you look at the actual pattern of productivity growth in this country over the last 20 years, it has been dismal. It has been very bad.
Once again, if you look at what they actually say at the Bank of Canada, they don't talk about productivity growth, even though that used to be their sort of cheval de bataille, as we say in French, at a time when they were actually putting forth inflation targeting.
In that regard, I would argue that the Bank of Canada has always argued that it cannot really impact on real variables, such as unemployment and the growth rate over time, at least not in the long term. Hence, it is ironic, in a sense, that it is now claiming that its policy has generated more employment and growth of output, when it has continually argued that its policy could not affect these real variables in the first place.
We're kind of seeing how it's been able to put forward and change its discourse over the last while. I would argue, basically, that what we should be doing is going back to a broader approach to dealing with how we should set interest rates in this country. We should not tie ourselves to one single goal. Rather, we should consider some other variable in the economy, such as unemployment or real growth in the economy. We should consider at least those as important so that we do not make the mistake of doing things that may actually be counterproductive, especially when we look at the uncertainty in the world environment today and when we're probably going to be facing higher rather than lower unemployment in the short term.
Thank you.
Conservative
The Chair Conservative James Rajotte
Thank you very much for your presentation.
Mr. Sumner, can you hear me?
Conservative
The Chair Conservative James Rajotte
Yes, we can.
If we could have your presentation now, we'd appreciate that very much. Thank you for being with us today.
Professor of Economics, Bentley University
Thank you for inviting me.
Let me say, first, that I think inflation targeting did improve things quite a bit, especially in Canada, but I think the current recession shows there are some flaws in inflation targeting and that we can do better. I have to admit, though, that probably right now the biggest advantages would be in the U.S. and Great Britain, but perhaps in the future in Canada as well, and even now it would benefit somewhat.
It seems to me that nominal GDP targeting is the logical next step in the process of improving our control of the macroeconomy. It would be more expansionary during recessions than inflation targeting. It would be more contractionary during booms than inflation targeting. It would tend to smooth out the business cycle somewhat. And very importantly, you could still maintain the same long-run average rate of inflation. So if the real GDP growth in Canada were 2.5% per year, on average, you could set a 4.5% nominal GDP target and still hit the same long-term inflation trend. It's really long-term inflation that matters in terms of the welfare effects of inflation.
Over the short-term business cycle, you could argue that what matters most is stabilizing employment, and for that, nominal GDP targeting does better. It especially does better in addressing disequilibrium in the labour market, so a sharp rise in oil prices with inflation targeting might require some contraction, which could hurt the manufacturing sector of the economy and increase unemployment there.
With nominal GDP targeting you have more flexibility dealing with things like supply shocks. It's also a better tool for dealing with liquidity traps. When interest rates hit zero, it can be difficult for a central bank using conventional techniques to stimulate the economy. Generally during that sort of period, nominal GDP has fallen much more sharply than inflation, so it gives you a much more aggressive nominal growth target. It allows the central bank to be much more aggressive in setting expectations, and that can be a valuable tool in escaping a liquidity trap.
We can see recently in Great Britain one strong advantage over nominal GDP. There are some rumours that it's an informal target of the Bank of England, and right now inflation in Britain is well above the official 2% target, yet almost everyone in Great Britain thinks that the economy is still depressed, and if anything, needs more stimulus. In fact, the fiscal austerity is quite controversial in Great Britain for that reason. So with nominal GDP targeting, because not all GDP growth is currently below 5% in Britain, that would allow the Bank of England to be expansionary, which is what people think is needed right now.
Another advantage of nominal GDP is that it's a simple, single target. Admittedly, there are versions of inflation targeting that are flexible, that deal with real shocks, to some extent, but that leads to a lot of ambiguity in monetary policy setting, and in some cases it allows the central banks to hide behind a very vague mandate. Admittedly, that's more of a problem in the United States right now than in Canada, but it becomes a problem if inflation targeting seems to be giving the wrong signals.
It's also easier to communicate to the public what you're doing. One recent example from the United States is that in mid-2010 our inflation rate had fallen well below the Federal Reserve's implicit goal of about 2% and the Federal Reserve announced that quantitative easing was going to be done to boost the inflation rate. But that turned out to be a very difficult sell politically because most people assume that a higher cost of living is something that hurts them. And most people don't understand macroeconomics well enough to understand how inflation can actually provide macro-stability in certain situations.
In contrast, if you are targeting nominal GDP, the Federal Reserve could have announced that they're not trying to boost Americans' cost of living, they're trying to boost Americans' incomes, because those have been depressed by the recession. Not all GDP is essentially national income. It makes it easier to communicate to the public what you are actually trying to do in a macro-stabilization sense.
So I think it has both technical advantages and political advantages, particularly in unusual circumstances like liquidity traps or supply shocks, where inflation targeting might not do as well.
Thank you.
Conservative
The Chair Conservative James Rajotte
Thank you very much for your presentation.
We'll now hear from Mr. Stanford, please.
Dr. James Stanford Economist, Canadian Auto Workers Union
Thank you, sir, and committee members. I am very grateful for the invitation to participate in this discussion.
I see that the government announced last week that the target is going to be extended for five years. I'm not sure how we'll fit into that decision process, but I think these issues of inflation targeting and monetary policy are among the most important economic issues facing the country, and I'm very honoured to participate in this discussion.
In my judgment, the economic and financial events of the last three or four years should lead us to fundamentally question both the theory and the practice of inflation targeting. The theory of inflation targeting goes as follows. There's assumed to be some kind of automatic tendency for the real economy to settle at some kind of a full employment equilibrium position, often defined as a NAIRU, non-accelerating inflation rate of unemployment. Monetary policy is seen to have no long-run impact on that real equilibrium. The best thing monetary policy can do, the theory goes, is to promote stability in prices and therefore greater certainty and better judgments by the participants in that real economy.
That underlying faith in the self-adjusting character of the real economy was never, I would say, justified. After the events of the last three or four years and especially facing a horizon of several years of difficult times to come, that underlying faith seems downright bizarre. Clearly, private markets are not necessarily efficient. The market economies do not automatically adjust to recreate full employment. They can become stuck for long periods of time in positions that are suboptimal, underutilized, and socially damaging.
While the inflation targeting regime in Canada is clearly temporally associated with lower inflation and more stable inflation, as the Bank of Canada's backgrounder makes clear, its success depends on the impact of inflation stability on the real economy. I will also point out that the disinflation and the lower and more stable inflation rates that were observed in Canada are also observed in many countries that did not adopt inflation targeting.
At any rate, the ultimate end goal of economic activity is not low and stable inflation. The ultimate end goal is maximum employment, productivity, and output. Has inflation targeting boosted these goals or not? The data contained in the Bank of Canada's background document, their own data, suggests that's not at all clear. Their table 1 shows that average real GDP growth has in fact been slower under inflation targeting than under the previous regime. The average official unemployment rate has hardly changed. Real long-run interest rates have not fallen at all. The table doesn't note it, but productivity growth in Canada has slowed notably under this regime. So the real economic benefits of low and stable inflation are hard to find, but I think we've become more aware in the last couple of years of some of the costs of getting to and maintaining a near-zero inflation target.
Very low inflation rates make it hard to facilitate relative price adjustments, including adjustments in the relative price of labour. Those relative price adjustments may require nominal price reductions, which are always difficult.
Very low inflation rates impose a binding floor to the operation of monetary policy, because interest rates can't fall below zero. Therefore in a 2% target world, real interest rates cannot fall below negative two. But in moments of crisis, you may want your real interest rates to be much lower than that.
Very low inflation rates increase the risk of deflation, because there's not much of a cushion before you tip over into negative inflation, which can cause all kinds of dangerous and explosive results on debt burdens and spending decisions.
Very low inflation enhances the real burden of debts on consumers and governments, and reduces real tax burdens, neither of which are desirable in the current context.
In light of these issues, there's a view among a growing number of economists that the optimal level of inflation is not 2% and it should be possibly higher, perhaps 4% or 5%.
My own conclusion is different. I find a flaw in the fundamental logic of inflation targeting. There are times when proactive monetary policy is necessary to be targeting particularly employment growth, increasing output, and helping the economy out of recession or even depression. An inflation target unnecessarily ties the hands of monetary policy in doing that.
I recognize fully that the practice of monetary policy in recent years at the Bank of Canada has been more flexible than the inflation target alone would make it look. I applaud that flexibility, which has been important in the current crisis. To some extent, I think we're maintaining a polite fiction, that the Bank of Canada is concerned with one thing and one thing only, namely inflation. In practice, they've been concerned about many things, and they've behaved accordingly.
Why don't we just acknowledge that the Bank of Canada faces a difficult but essential task of balancing different goals? The pre-eminent goal should be the maximization of output and employment to foster long-term sustainable productivity growth. That goal has to be pursued within the constraints of other issues, such as sustainable inflation, sustainable external balances for the country, and sustainable social and environmental performance.
The ultimate goal is real output and employment. The Bank of Canada should be given a diverse and flexible mandate that allows that pre-eminence to be respected.
Thank you.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Mr. Stanford.
We'll go to Mr. Ragan now, please.
Professor Christopher Ragan Associate Professor of Economics, McGill University, David Dodge Chair in Monetary Policy, C.D. Howe Institute, As an Individual
Thank you for inviting me.
Canada's monetary policy is very important to Canadians' living standards, and I'm very happy to be discussing details—sometimes contentious details—with my peers.
I should begin by clarifying my affiliation. I notice that Mario was listed as representing himself, but I am listed as representing McGill University. That's probably because I incorrectly filled out the form. So though I would be delighted to be asked to write McGill University's official view on inflation and monetary policy, I feel that they will never ask me to do that, so I should claim to be speaking only for myself.
Prof. Christopher Ragan
In case it's not clear from my comments, let me try to make it clear at the outset that most of what I say will disagree largely with not everything that Jim and Mario have said but with elements of what Jim and Mario have said and with only a little bit of what Scott has said.
I think it's important at the outset when thinking about monetary policy to recognize the modest impact that central banks can actually have on the economy over a sustained period. In fact, I think the disagreements that I have with Jim and Mario and possibly with Craig will come down to that point: what kind of effect can the central bank have on the economy over short periods of time, and what kind of effect can it have and on what variables over long periods of time?
I believe that Canada's inflation targeting framework has been a great success. The system began in 1991, as you know. The inflation target has been at 2% since 1995, and since that time inflation has been lower and more stable than it was in the previous 30 years. I think that stability of inflation is good for the stability of the economy. I think it is good for planning. A very important part of inflation targeting is the extent to which it helps to anchor the expectations of inflation--the expectations of households, of firms, of participants in financial markets--in response to shocks of various kinds. And of course our economy is subject to shocks of various kinds.
As you all know, the bank and the government recently announced their new agreement for five more years, which will leave the status quo largely unchanged, and, all things considered, I think that was actually a good decision. So let me be here today as a defender of the status quo, although there were some alternatives the bank and the government considered, which could have been chosen.
Targeting nominal GDP, as Scott said, is one alternative. As Scott explained, a perceived advantage of targeting nominal GDP is that it gives the bank--or any central bank, but the Bank of Canada in this case--more flexibility in being able to take its eye off of inflation and be concerned a little bit more about real GDP growth in the short run.
In my view, the problem is that makes the bank officially indifferent, if you like, to various combinations of real GDP growth and inflation. The sum of those two is nominal GDP growth. So if it is going to put more emphasis on real GDP growth in the short run, by definition it must put less emphasis on inflation. The result of that, I think, is almost certainly that inflation will be a little bit more volatile over the business cycle.
The danger with that is that it may dislodge those well-entrenched, well-anchored expectations. I am concerned about that possibility, given that it takes a long time for monetary policy to develop the credibility necessary to actually establish and anchor those expectations.
Scott also said that you could have the same long-run trend of inflation in a world of nominal GDP targeting, and that's true under some conditions. Canada, more so than the United States, is faced with an aging population. They have aging there as well, but their demographics are a little bit better than ours, and we will have a declining rate of real GDP growth over the next 15 years, due simply to the aging of the population and the withdrawal of retired Canadians from the workforce. Other things being equal, that reality will reduce the rate of GDP growth.
If we were targeting nominal GDP from now to the future, in a world where real GDP growth on trend would decline, there would be a trend to increase in inflation. I see no reason why we should be sanguine about an increase in the costs that come from that inflation.
Another option is targeting full employment. Mario talked about how in the past the bank did not work hard enough to combat the unemployment rate, and Jim talked about how the bank might pay more attention to variables other than just inflation. So, at least on the surface, targeting full employment is an attractive option.
The problem is the concept of full employment is very slippery. You can look all you want at the data published any place by Statistics Canada and you will not see a measure of full employment. Why? Because it is not something that is directly measurable. It is a concept that is very useful and that economists use to organize their thinking about the operations of the economy, but it is not something observable in the data. You can only use our models to back out an estimate of full employment, but the models of course are contentious.
Mario's preferred model will almost certainly be different from Jim's, mine, and Craig's. That means if we're going to disagree about the models, we will disagree about the estimate of full employment that comes from those models. Then if you have a target for the central bank around which there is disagreement on the measurement of the variable, what basis is that for actually targeting monetary policy?
Prof. Christopher Ragan
Another point on the full employment targeting comes back to my point about the modesty of monetary policy. There has been a growing recognition over the years that central banks have a very difficult time influencing real variables in a systematic way over the long run. The central bank's balance sheet, which is its only instrument, is fundamentally a nominal variable. It is about dollars. It is not actually about real things like productivity or employment. So it is difficult for the central bank to be able to systematically and in a sustained way influence real variables. It's much better for it to focus on the control of inflation.
I'd also make a point about the flexibility of central bank policy. Jim alluded to this, and I think he's quite right. There is flexibility in the current system, but it is what the bank and economists call constrained discretion. If that term intrigues you at all, we can come back to discuss that in the questions.
Thank you very much.
Conservative
The Chair Conservative James Rajotte
Thank you very much for your presentation.
We'll now hear from Mr. Alexander, please.
Craig Alexander Senior Vice-President and Chief Economist, TD Bank Financial Group
Thank you.
It's a real pleasure to have an opportunity to chat with you about this terribly important subject.
The goal of monetary policy is ultimately the management and supply of money and the level of interest rates in a manner that supports economic growth and the highest possible standard of living. That's what we want to do. From the point of view of highest possible standard of living, this also means that you really want to have as close to full employment as you can.
I would argue that the central mandate of the Bank of Canada already encompasses a multi-dimensional approach to the ideal environment they are hoping to achieve. We need to understand that they are only one part of the bigger economic system, and they have limited impacts.
As to how to achieve this goal, there are various options. Let's be honest: all the options have pros and cons, and no one approach is perfect. So what's the mandate that we've had and what's the mandate that's just been renewed? Since 1991 the Bank of Canada has been targeting inflation. Since the end of 1993, it's been the 2% midpoint target of the 1% to 3% range.
Economic theory tells us that in the short run monetary policy can have a big impact on the economy. We can see the effect of lowering interest rates in early 2009 and the impact this had on the housing market in Canada, helping to boost domestic demand and mitigate the recession.
Over the very long run, the impact of monetary policy is primarily on the level of prices. If you're going to create a low and stable inflation environment over the long run, over several business cycles, you should see evidence that it will lead to the economy growing at around its long-term trend, with lower and more stable unemployment.
What's the evidence? Well, over the last two decades we've seen inflation average almost exactly 2%, so the Bank of Canada has to be commended for hitting their target almost perfectly over a two-decade period.
Then you look at economic growth. Economic growth has been 3%. Most economic estimates would say that 3% through the 1990s was probably the potential rate of growth, the long-term trend in the rate of growth. Right now I think the trend rate of growth in Canada has slowed, so we'll be lucky if we actually get 3% on a sustained basis going forward. That's not a reflection of monetary policy; that's a reflection of demographics and productivity. The Bank of Canada does not have control over productivity. They can help encourage investment by having interest rates lower. They can lead the horse to water, but they can't make it drink.
We've seen that we have had periods of low unemployment in Canada. We reached a point where unemployment was at a three-decade level. In fact, it was creating problems for parts of the economy. The reason we had higher unemployment in recent years had to do with an external shock to the Canadian economy. It had nothing to do with the domestic economy, and that's what domestic economic policy can affect.
I would argue that the existing mandate has served the country very well. Could we change the target? Yes, we could lower it. If we lowered it, you'd start running into challenges of measurement. When you start getting down to around 1%, people start to worry about deflation, so maybe 1% is a little too low. If you raise it, I'm not sure why you'd want to reduce the purchasing power of people's money over the long haul at a faster rate. So 2% seems like a very reasonable target.
The next question is, would an alternative model serve us better? The last model has been doing a good job. Should we adopt something different? I think it's a very reasonable and healthy thing to have the mandate renewed periodically and to have discussions like this about what the appropriate mandate should be. When I think about all the other options and the current target, I'm reminded of the quote by Winston Churchill that democracy is the worst political system except all the rest.
Regarding the inflation-targeting environment, I think there are lots of other options. You can have a lot of complaints about the 2% target, but it's probably the best among all the other options. We could target full employment, except that we don't actually know where full employment is. Estimates are somewhere between 6% and 8%. And I don't think it's useful to have a target that you can't pinpoint.
I would contend that actually the unemployment rate is in the decision-making function of the Bank of Canada, because when it is setting monetary policy it does consider a large number of other variables. One of the core variables it looks at is the amount of slack in the economy and the output gap, and that is largely a function of what's happening in the labour markets. The Bank of Canada does implicitly build unemployment into its thinking about where monetary policy should be headed without its being the explicit target of the inflation rate.
Regarding nominal GDP targeting, I've got to be honest that I actually think there's a compelling argument for the U.S. Federal Reserve to have a nominal GDP target. I don't actually think it's appropriate for Canada. I think the main issue here is that the U.S. economy is currently in a liquidity trap, where low interest rates are not going to propel stronger economic growth or above-trend economic growth, but this is an exceptional situation. I'm not convinced you should actually adopt an exceptional policy that's appropriate for another country as the business-as-usual target for Canadian monetary policy.
I think there are a lot of reasons that nominal GDP targeting would be effective in the United States. I'm not sure that we should adopt it here, for many of the reasons Chris outlined, because at the end of the day, I don't think we are indifferent between targeting 4.5% nominal GDP growth and 4.5% inflation and zero real growth.... I'm not indifferent between that and 0% inflation and 4.5% real economic growth. So it's a functional challenge.
I think there is a lot of merit to price-level targeting, and this something the Bank of Canada is very enamoured with. My main problem with it is a communication issue, and that is that if you end up with inflation at 1% for an extended period of time, you probably should run 3% over a period of time to get you back to 2%. The problem is that when you get to 3%, if it's sustained for a length of time, you're going to get the media and markets worrying that 3% isn't the peak, and it could lead to un-anchor inflation expectations.
Lastly, in terms of dual mandates, I think if you have one target it's a very simple way of characterizing what the bank is doing. If you have dual targets, I think you take your eye off the ball, and that runs the risk of creating an inflation problem.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Mr. Alexander.
We're going to begin members' questions with Mr. Julian.
I'll just remind members and witnesses that members have a very short time, about five minutes, for each round of questions. If we can be very brief in our questions and responses, it will assist members in their deliberations here.
Mr. Julian, please.
NDP
Peter Julian NDP Burnaby—New Westminster, BC
Thank you, Mr. Chair.
Thanks to our witnesses. You've given us a lot of food for thought.
I'd like to start with you, Mr. Stanford. I have three questions.
First off, as you know, the job figures for October were very sobering. More than 72,000 full-time jobs were lost in the Canadian economy. You referenced how the Bank of Canada has been acting and I think Mr. Ragan's phrase was “restrained discretion”. I'm wondering how you feel about the renewal of the inflation-targeting agreement between the Bank of Canada and the federal government, whether you think that's a mistake or that within that restrained discretion there is some room for monetary policy addressing what is becoming a bit of a joblessness crisis in our country.
Second, you pointed out in your presentation that we've had the same stable inflation rate as countries that don't do inflation targeting. Are there other countries that have maintained a stable inflation rate and have done a better job on employment targeting with monetary policy?
My third question to you is around the definition of full employment that both Mr. Ragan and Mr. Alexander raised as something difficult to define. I would like to have your reaction on that.
Economist, Canadian Auto Workers Union
Thank you, sir.
In terms of the job numbers, this month's numbers were very worrisome. Whether that's a one-month blip—there is a bit of month-to-month movement in these things—or the sign of something worse is not yet clear. But we have never in recent history had a jobs number like that without being in a recession. So that gives me serious concern.
I think the Bank of Canada has been ambitious, flexible, and aggressive in its response to the crisis. But I do think that its hands have been unduly tied by at least needing to give nominal—and I guess that's a mixed adjective in this setting—or at least a token gesture that it still is guided by the inflation target, which clearly wouldn't make sense. Core inflation is rising in Canada right now, driven by commodity prices, and that's one of the problems with inflation targeting. The labour market is not the only source of inflation.
So in this regard, I don't think the quick renewal of the mandate for another five years helps. But I am going to recognize the Bank of Canada's creativity and flexibility and hope it continues to exert that way.
There are many countries that do not have formal inflation targets where inflation followed a similar path to Canada, and there are many countries that have performed better than Canada in labour market terms. Some of the Asian developed economies and some of the European developed economies have had consistently lower unemployment rates. Whether that's due to different monetary policy.... I suspect it reflects a whole mixture of economic policy institutions.
In terms of the challenges in defining full employment, I'll certainly acknowledge that. I will say there are many challenges in defining inflation as well but that hasn't stopped inflation targeting from picking one of them and zeroing in with razor-like focus to the detriment of other objectives that monetary policy could follow.
In terms of measuring inflation, there are very important empirical and theoretical issues about consumer prices versus GDP deflators. Do you measure all items, or do you just look at core items? The major failing of the focus of inflation targeting on the CPI has been the failure to recognize asset price inflation and the dangers of asset price inflation. When you see a totally unsustainable bubble in asset prices, whether that's housing in the U.S. or dot-com stocks in an earlier era, that never enters into the monetary policy-makers frame when you have a uni-dimensional focus on CPI inflation, even though it clearly reflected credit conditions. You couldn't have an asset bubble without enormous growth of credit conditions, which is a monetary variable, even though monetary policy could play a role—a difficult role, but a role—-in trying to prevent those types of problems from arising.
Measurement difficulties are inherent whatever goals are chosen, and we'll just have to do our best to sort them out. But measurement difficulties have been a factor in inflation targeting as well.
NDP
Peter Julian NDP Burnaby—New Westminster, BC
Okay.
Just quickly to Mr. Seccareccia, you said that with the uncertainties we're living with now we need to consider other variables, like employment. Are you saying particularly now, given the difficulties, that we need a different mandate, a different type of agreement?