Mark Carney, the Governor of the Bank of Canada, made a persuasive defence of the central bank's policy of flexible inflation targeting on Friday in his speech to the U.S. Monetary Policy Forum – in the course of which he placed Canada's "non-crisis economy" in an international context.
He emphasized that "flexible" means just that. It does not mean flexible on the upward side, that is, erring on the side of looser credit and higher prices. Nor is it a mechanical recipe (either a mechanism built into the system, or a formula by which policy-makers make their decisions) such as the Taylor rule – named after John B. Taylor of Stanford University (which can, however, serve well as a rule of thumb, for purposes of comparison).
Mr. Carney steered reasonably clear of complacency about the performance of Canada and its central bank. In effect, he acknowledged the truth of the late American economist Hyman Minsky's financial-instability hypothesis, which can be crudely summarized as saying, "Stability causes instability." Or as Mr. Carney put it, "Low, stable and predictable inflation can feed complacency among financial market participants, as risk-taking adapts to the perceived new equilibrium. Indeed, risk appears to be at its greatest when measures of it are at its lowest" – which is a most unsettling paradox
In other words, the Great Moderation of the 1990s and the early 2000s led to a similarly great immoderation.
Of course, one can never say everything at once. Conspicuous by its absence, however, in this effective justification of very low interest rates and a highly accommodating monetary policy, is a discussion of the harmful consequences of such rates – apart from a couple of short paragraphs about a somewhat worrying level of household debt, a theme of Mr. Carney's for some time.
But there is hardly any reference to the difficulty of saving in an age of minimal interest rates. Concern is rising, and warranted, about the ability of Canadians to retire, and about the realism and the viability of many pension plans – especially in the public sector – in which out-of-date levels of interest rates are assumed, now very dubiously.
Mr. Carney gave an excellent account of inflation targeting last week in New York City. It is to be hoped that he will find an occasion to discuss with equal lucidity the problems of interest rates that are not far from the dreaded zero bound.