Canada can improve upon its existing monetary order based on a 2% inflation target, says a study released Thursday by the C.D. Howe Institute.

The study’s authour, William B.P. Robson, recommends improvements to the current regime when it expires in 2011, including a lower inflation or price-level target, and stronger accountability for the Bank of Canada’s performance in hitting the target.

Canada’s current 2% inflation-targeting regime has a record of success that sets the bar high for improvements, Robson notes. Yet the current target has key defects: by the end of 2011, 2% annual inflation will reduce the Canadian dollar’s value by more than one-quarter since 2% targeting began in 1995, and the annual inflation target makes the future price level less predictable as the forecast horizon lengthens.

On the positive side, the 2% regime’s success suggests that better protecting the dollar’s purchasing power would be easier and more rewarding than once thought.

IE