Canada’s top banker says the central bank’s approach to inflation targets has been working reasonably well, but there are gaps that could be addressed with the development of new economic models.
Bank of Canada governor Stephen Poloz says the bank has been pursuing inflation targets for 25 years, and the average rate of inflation has been extremely close to target over that time.
But in a prepared text of his speech, Poloz says recent experience suggests there are shortcomings — pointing to the 2007-09 global financial crisis as one example where economic models have struggled to explain what led to the crisis and what followed.
He says it can take up to two years for a change in interest rates to have its full effect on inflation, and central bankers need tools that can forecast where inflation is likely to be two years from now so they can adjust monetary policy to hit the inflation target.
That’s why the bank is investing in new computer economic models to improve decision-making, he says.
Poloz was speaking at the University of Alberta’s School of Business in Edmonton.