Q&A: Bank of Canada’s Wilkins on innovation, inflation targets and Canada’s boomers

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(Globe and Mail economics reporter David Parkinson sat down with Bank of Canada senior deputy governor Carolyn Wilkins for an exclusive interview, ahead of her speech Friday laying out the central bank's medium-term strategic plan – focusing its next three years on innovating its approach and redoubling its research focus to better address the shifting global economic, financial and technological forces affecting central banking. The following is an edited and condensed version of that interview.)

DAVID PARKINSON, THE GLOBE AND MAIL: We have a new Liberal government that also talks about focusing on innovation and evidence-based policy. Have you had a chance to sit down with Justin Trudeau and Bill Morneau yet, or have a conversation?

CAROLYN WILKINS, THE BANK OF CANADA: I haven't had a chance yet. That will come. When it does, it's something we tend to do amongst ourselves. Certainly, the bank has always had a very good relationship with whatever government there is. That's probably because of our strong institutional framework that we have, both legislatively and with the public service. So we're really looking forward to working with the new government.

G&M: "Innovation" is one of those words that seems to roll easily off people's lips, in almost any organization you can think of. But it's a lot harder to do.

CW: You're absolutely right. You can come up with an ambitious plan … once you've done that, you have to think about, how do we imbed that into our culture so it actually happens? Any institution has natural obstacles to innovative thinking. From our point of view, making people feel comfortable to speak out, making debate a central part of a natural process, a really healthy process, not only inside the bank but outside the bank, working on leadership qualities or characteristics that we want our leaders in the bank to have, are all part of that.

Research is part of innovation, so of course that's why it's at the centre of our plan.

We have a very smart work force. We've got some of the best and brightest in Canada. And they're pretty entrepreneurial. But in order to get the best from our people, we need to do a couple of things to enable it. One is to create an environment where they can do their research and come up with innovative ideas, and publish them, in working-paper form, so that the staff can get feedback from academics, from people in the financial industry … that scientific process is what really brings us along.

I think a second thing is to find ways to get different types of expertise together in the same room. More and more you're going to be hearing about how economics needs to leverage expertise in other areas, like IT, for example, or psychology. Because the questions we're facing require us to do that.

G&M: One big potential area of potential policy innovation that the bank has already been talking about is in the renewal of the five-year inflation-target agreement with the federal government, coming up next year. And two key issues surrounding that – the question of adopting alternative inflation measures, and the comfort level with the existing 2-per-cent inflation target. Now that the bank's research has taken a more in-depth look at these issues, is anything evolving in terms of the bank's thinking on those?

CW: Where the Governing Council is at right now is really in listen-and-learn mode. What you're seeing are summaries and background material that we are listening and learning from. There's nothing to say about where we are coming out on any of these issues.

Clearly it's important for us to understand where underlying inflation is, for obvious reasons. It's important for us to have the right measures. What we have learned from the research so far is that there's no perfect measure. CPIX [the bank's core inflation measure] is not performing as well as it used to. We'll be looking at ways to deal with that.

If we're targeting 2-per-cent inflation, and the neutral rate of interest is lower than it was before, then that means the chances of us hitting the zero lower bound with respect to nominal interest rates is higher. So what really matters is what are the other tools you could use if you get there? Quantitative easing being one of them, moving interest rates below zero being another. We've got a lot of experience that we have looked at from other countries over the last few years. That analysis is helping us gauge how important it is that the target is at 2 per cent, rather than at 3 or rather than at 1.

The purpose for us to publish this [research] is precisely to see how people react to it and the kinds of comments we have – whether they are private-sector economists or academics – these kinds of reflections are important for us to listen to.

G&M: The Globe has dedicated the past week to addressing economic and other issues surrounding the aging of the baby boomers. When you're looking at some of the evolving questions that the bank is grappling with, how big a role is the fact that we have this greying demographic?

CW: It plays a big role. When you need to determine what is the sustainable rate of growth of the Canadian economy – "potential output," the rate that the economy can grow without creating inflation – that depends in large part on demographics. It tells you how much labour you can bring to bear to produce things. It's also going to tell you something about productivity. Over the past five years, aging of the population has subtracted nearly half a percentage point off potential output growth. The lower potential output is, the more likely it is that the neutral rate of interest is going to be lower.