"...the evidence broadly supports the merits of inflation targeting as a monetary policy tool for central banks that have clear independence."
March 31, 2016 – International evidence shows the wide economic benefits of inflation targeting, says a ground-breaking C.D. Howe Institute report. In “Mounting Evidence: Findings from Natural Experiments in Inflation Targeting,” author Michael Parkin shows how the evidence broadly supports the merits of inflation targeting as a monetary policy tool for central banks that have clear independence.
“As the Bank of Canada approaches its deadline to renew its inflation-targeting mandate, it will face competing pressures regarding which areas of economic performance to focus on,” commented Parkin. “However, the evidence strongly suggests that the Bank should steadfastly guard its inflation-targeting arrangement.”
The author surveys a sample of 27 advanced countries from 1980 to 2013, comparing the macroeconomic outcomes of inflation-targeting experiments with outcomes for economies in which monetary policy arrangements have not changed. The three categories are as follows:
- Economies that adopted inflation-targeting during the study period;
- Economies that adopted inflation-targeting and later became more independent from their governments during the study period; and
- Economies with monetary arrangements that did not change during the study period, which form the control group.
The author’s main conclusion is that when a central bank becomes an inflation targeter or an inflation targeter with more independence from government, the inflation rate and the variability of inflation fall, the growth rate of real GDP increases and its variability decreases, and the unemployment rate falls.
Parkin concludes: “The policy implications of these experiments are clear: that the Bank of Canada should remain fiercely independent and continue to utilize inflation targeting. Central banking might be improved but it does not appear to need reinventing.”
Click here for the full report.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: Michael Parkin, Professor Emeritus, University of Western Ontario and Research Fellow, C.D. Howe Institute; 416-865-1904, or email: kmurphy@cdhowe.org.