Last Friday’s non-bubbly housing start numbers and weak employment data should not distract Canadians from two key points. First, after a short, sharp economic shock, Canada’s economy began its recovery in late spring 2009 and has hardly paused since. Second, in comparison with the U.S., the EU, and especially the U.K, Canada’s performance has been stellar.
Canada’s performance certainly bought attention in the U.K., where some of the credit has rightly landed in the lap of Bank of Canada Governor Mark Carney.
Last week, Mr. Carney landed in London for a public pre-entry interview by the House of Commons treasury committee, which wanted to know how he would manage monetary policy at the Bank of England, where he takes over in July. The committee had not previously held such a hearing for an incoming governor. Nor, to my knowledge, has a Canadian central bank governor previously given such detail on his thinking on monetary policy and managing another country’s money and financial market regulation – 45 densely written and footnoted pages.
Mr. Carney made clear that the institutional and regulatory factors that may have contributed to Canada’s relative success may not transport well to the U.K. But he did not use the word “luck,” which many economists would describe as a key feature in Canada having missed the brunt of the globally protracted economic storm. (The technical economic term is “horseshoes.”)
And that is what makes interesting his views on Canada’s domestic monetary policy framework, which arguably played an important role in our recent economic success and therefore are a likely guide to the central bank’s future thinking on the issue.
Mr. Carney briefly nodded to Canada’s 2-per-cent inflation target, set within a floating exchange rate system – much like the U.K.’s. His real focus, however, was on flexibility, meaning the pace at which the Bank of Canada would get around to hitting its target.
In 2009, bank speeches began to point out that while Canada tended to hit its inflation target on average, the number of months it took for the inflation rate to move was sometimes few and sometimes many. Previously, this was taken to be an ordinary bug in the conduct of monetary policy; that monetary policy had its apparent effects only with “long and variable lags,” and, as former governor John Crow used to say, one could see policy’s future impact only “through a glass, darkly.”
With the November, 2011, renewal of the 2-per-cent inflation target between Ottawa and the Bank of Canada, this flexibility became official bank policy. No subsequent formal bank addresses have failed to use the prefix “flexible” when describing Canada’s inflation targeting program.
If one can be flexible about the time it takes to hit inflation targets, one has intervening time to pay attention to other things. In the U.K., Mr. Carney mentioned as possibilities countering the effects of rising oil prices (a sore point there, with North Sea oil revenues on the decline), or promoting adjustment to credit crunches or financial excesses.
If languorous attention to the inflation target is permitted, the list of potential distractions can get long. Charles Evans, president of the Federal Reserve Bank of Chicago, speaking to the C.D. Howe Institute last fall, argued that getting U.S. unemployment down to 6.5 per cent was the right target, and this is now Fed policy. Ignoring inflation and instead setting a dollar target for national income is an idea that has raged in the economics blogosphere for 18 months, and which has now appeared several times in Mr. Carney’s public words.
Many new ideas will sound good in the U.K., given the country’s economic performance (for which sluggish would be too kind a word) and and an inflation rate that has sat well above its target for most of the past five years.
In Canada, however, we seem to have been more than decently served by the 2-per-cent inflation target, even if, in retrospect, it sometimes took us a few months to get back to it. A flexible exchange rate, tolerable federal fiscal performance, decent financial sector regulation – all have added to Canada’s relatively shiny economic performance. These, and more than a few horseshoes.