Could a higher inflation target enhance macroeconomic stability? / by José Dorich ... [et al.].: FB3-5/2018-17E-PDF

“Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP"--Abstract, p. ii.

Permanent link to this Catalogue record:

Publication information
Department/Agency Bank of Canada.
Title Could a higher inflation target enhance macroeconomic stability? / by José Dorich ... [et al.].
Series title Bank of Canada staff working paper, 1701-9397 ; 2018-17
Publication type Series - View Master Record
Language [English]
Format Electronic
Electronic document
Note(s) "April 2018."
Includes bibliographical references (p. 28-32).
Includes abstract in French.
Publishing information [Ottawa] : Bank of Canada, 2018.
Author / Contributor Dorich, José.
Description 39 p. : col. charts.
Catalogue number
  • FB3-5/2018-17E-PDF
Subject terms Inflation
Monetary policy
Econometric models
Request alternate formats
To request an alternate format of a publication, complete the Government of Canada Publications email form. Use the form’s “question or comment” field to specify the requested publication.
Date modified: