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Inflation Control Agreement

Although the framework for managing inflation itself was not an important topic during the election campaign, the main opposition party had regularly criticised the BoC for following a policy that was too strict politically. [10] Although the agreement did not set targets for the post-1995 period, the above-mentioned press release stated that „the objective of further reductions“. until price stabilization is achieved.“ [9] In addition, a background paper published at the time of the announcement set out the general argument for price stability as a long-term objective (Bank of Canada 1991a) that stated that „inflation creates uncertainty, forces households and businesses to divert resources from productive efforts, and is socially unfair.“ On the other hand, price stability would allow the economy to „work more fairly and productively“. People`s purchasing power is not undermined by inflation, as „wages will probably be higher first and probably more,“ Mendes said. Following the precedents set by the 2001 renewal, the BoC identified, in the remaining 2000s, three problems justifying a pre-agreement survey: (i) the time horizon within which policymakers should aim to bring inflation back to target; (ii) the extent to which monetary policy should respond to asset price movements; and (iii) the usefulness of core inflation as a guide for monetary policy. The level of the target was therefore not a key theme of the 2006 renewal, which eventually extended the 2% target until 2011. Nevertheless, the findings on these three issues had a strong influence on the shape of the target framework. For this renewal, the BoC has organized and implemented an extensive research program to systematically answer key questions. Unlike previous extensions, the 2001 agreement was put into circulation along with a series of substantive documents in which the BoC explained in detail its arguments (Bank of Canada 2001a, 2001b, 2001c). The background documents also provided a considerable amount of operational information, including the announcement of a change in the BoC`s preferred measure for core inflation, as well as a clarification that policymakers focused on the central point of the symmetrical control zone and stressed that the band was not a „zone of indifference“. [18] There are strong arguments in favour of a real determination of central inflation, in which the components of the index are weighted according to their degree of leniency.

Moving towards such an index could increase economic benefits by making monetary policy more effective, even if it is headline inflation that is costly for households. While it may not be possible to agree on such an index in time before the 2016 agreement, the Bank should prepare to target another index over the medium term. The ELB`s estimates have also been revised downwards during this period, with several central banks beginning to experiment with negative policy rates as an additional source of impetus. . . .

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