When former IMF chief economist Olivier Blanchard said in 2010 that central banks in advanced economies should aim for 4 percent inflation, he was castigated as a heretic. But occasionally, heretics become heroes. This summer, Blanchard’s ideas went mainstream. In August, John Williams, an influential member of the Federal Reserve’s policy committee, said chronically lower inflation implies that central bankers should adjust their policy goals accordingly. The Economist quickly followed with an editorial that called on rich-world central banks to either raise their inflation targets or set policy to achieve a certain increase in nominal gross domestic product. Greg Ip issued a mea culpa, writing that he had been wrong to dismiss Blanchard six years ago, when he was at the Wall Street Journal, and that the Fed should double its inflation goal to 4 percent.
Bank of Canada Governor Stephen Poloz must have been watching all of this with bemusement. Canada’s central bank had been actively researching the viability of a higher inflation target since 2014. Its five-year mandate was up for renewal in two years, and one of the questions under consideration was whether its 2-percent target was high enough. By the time Williams went public with his questions, Poloz was settling on some answers. “Since 1991, our current flexible inflation-targeting framework has served Canadians well, in calm and turbulent times,” Poloz wrote in a letter to Finance Minister Bill Morneau dated Sept. 21. “It has contributed importantly to macroeconomic and financial stability and thus to sustainable economic growth and higher living standards. Therefore, the bar for change is high, and, based on the evidence, we see no strong justification to alter the framework at this time.”
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