How The Monetary Framework Of Improving Inflation Targeting Within Canada Through Conventional Forward Guidance ( Cfg )

How The Monetary Framework Of Improving Inflation Targeting Within Canada Through Conventional Forward Guidance ( Cfg )

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“How to Improve Inflation Targeting in Canada?” is a researching paper from IMF official website. This research paper is mainly about how to further enhance the monetary framework of improving inflation targeting in Canada through “conventional forward guidance (CFG)” (P3) Improving inflation targeting basically means keep or increase the inflation rate at 2 percent. This amount of inflation targeting was settled since the Federal reserve’s determined that 2 percent “is most matching their long-term mandate for price stability and maximum employment.” (Jared, 2014) The central bank of Canada also use this target, and it did great work on achieving and maintaining this goal. However, a certain range of negative output gap kept deducting inflation rate. Output gap affects inflation, overnight interest rate is a very important measurement links these two elements. But the targeting of overnight rate that Canada made for the future weeks won’t provide any essential influence on achieving inflation targeting, thus certain improvements such as CFG can help Canada re-approach the 2 percent target.

The overnight rate, literally, is the rate that central banks set for one trustworthy bank institutions lending money to the other one for one night. The higher the overnight rate, the higher the interest rate. As we learned in class, once the interest rate is increasing, it will be more expensive for people to borrow money from the bank. So people tend to save money rather than spending money. As the purchasing power is decreasing, people’s demand for good are decreasing. It will slow the economy and decrease the inflation that goes away from the inflation targeting. So, interest rates become crucial in the process of achieving inflation targ...

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...he exchange rate, high inflation can result a country’s in currency depreciating. More importantly, it is an effective way for a country to avoid deflation or the dark corner. In contrast to the relatively high inflation, deflation is more harmful for the economy, such as increasing the unemployment rate. Therefore, it is necessary for Canada to improve and maintain the 2 percent inflation target, with the CFG suggestion, its inflation rate will return to the target.

Works Cited
Obstfeld, Maurice, Kevin Clinton, Ondra Kamenik, Douglas Laxton, Yulia Ustyugova, and Hou Wang. "How to Improve Inflation Targeting in Canada -" International Monetary Fund. N.p., 26 Sept. 2016. Web. 31 Oct. 2016.

Bernstein, Jared. "Why Is 2 Percent the Federal Reserve’s Inflation Target? Because It Is." Washington Post. The Washington Post, 25 Sept. 2014. Web. 31 Oct. 2016.

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