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The Great Rethink: Why the Bank of Canada’s mandate needs a refresh

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“This is an excellent time to be considering many of these policy options and giving them some serious regard because we’ve seen such dramatic changes in the global economy and fiscal and monetary balance sheets,” Luba Petersen, an associate professor of economics at Simon Fraser University, said at a virtual conference hosted by McGill University’s Max Bell School of Public Policy this week.

A government that just set an ambitious hiring goal is bound to wonder whether the Bank of Canada can be more like the Fed

The Bank of Canada has done an excellent job of containing inflation, but perhaps it’s erred too often on the side of caution. There is reason to wonder, if not yet conclude, that Canada’s approach to monetary policy has become obsolete.

The Fed contributed to a disaster in 2008 by assuming Wall Street could be trusted to manage risk; more recently, it has demonstrated that it is possible to keep interest rates much lower, and for considerably longer, than most thought possible without stoking runaway inflation.

A government that just set for itself an ambitious hiring goal is bound to notice and wonder whether the Bank of Canada can be more like the Fed.

It can be, according to Douglas Laxton, a former Bank of Canada and International Monetary Fund economist who now is an adjunct professor at Portugal’s Nova School of Business and Economics: all it needs to do is adopt an employment objective to go along with its inflation target.

“Unemployment is the real problem,” Laxton said at the McGill conference.

Bank of Canada officials have sniffed at the Fed’s dual mandate over the years, calling it a political more than economic imperative. There’s a rule in economics that states central banks can only realistically achieve one target: the benchmark interest rate works more like a shotgun than a sniper’s rifle.

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