Tiff Macklem\u0027s legacy will be defined by whether he leaves the Bank of Canada better equipped to confront future crises. Read more.
in December 2021, the Bank of Canada devoted considerable intellectual energy on whether targeting inflation was still the best way to achieve price stability. That work was conducted under the assumption that disinflation would be the bigger worry in the future, not inflation. Policymakers spent four years worrying about economic growth. The prospect of higher interest rates and persistent inflation was a forgotten problem.
“This entrenched a mindset that playing it safe meant erring on the side of leaving interest rates at emergency levels, irrespective of the evolution of the data,” Caranci said. “The burden of proof required the data to not just convince the central bank that it would succeed in its inflation mandate, but to erase every millimetre of doubt.”
The Bank of Canada might now have flipped, as Macklem has been clear he will err on the side of crushing inflation, even if that means causing a recession. Maybe that means we’re about to replace an era of placidity with one of constant volatility, as central bankers jump from dousing inflationary fires to trying to reignite them.
Surely we can do better than that, but discovering whether that’s true might require central banks to be more like Charles Darwin. “Hindsight is a great instructor but not a practical tool in the moment,” Caranci said in her paper. “Better to focus the lens on avoiding bias that anchors to past dynamics blind us to current developments.”
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