THE PROB­LEM WITH CANADA'S MON­E­TARY POL­ICY REGIME

Bank of Canada's man­date up for re­newal next year, Kevin Carmichael writes.

Calgary Herald - - FP CALGARY -

Canada's mon­e­tary pol­icy regime works fine, by most ac­counts, but it's not as cred­i­ble as it could be. For ex­am­ple, in 2016, Stephen Poloz's Bank of Canada and Bill Morneau's Fi­nance Depart­ment, af­ter very lit­tle pub­lic dis­cus­sion, de­cided to re-up the ex­ist­ing ap­proach and lock in the two-per­cent in­fla­tion tar­get for an­other five years. It was akin to a bud­get speech at mid­night.

Democ­ra­cies aren't sup­posed to work that way. Don't blame the tech­nocrats; they were just do­ing their jobs. Those of us who make a liv­ing off the demo­cratic ideal — cabi­net, leg­is­la­tors, aca­demics, re­porters — were asleep at the switch. Most of the elec­torate prob­a­bly had no idea mon­e­tary pol­icy was even up for dis­cus­sion.

The Bank of Canada's man­date is up for re­newal next year, and this time will be dif­fer­ent. The cen­tral bank has set a new stan­dard for how an arm's-length Crown cor­po­ra­tion should en­gage with the peo­ple it ul­ti­mately serves.

The eco­nom­ics academy has also stepped up. Univer­sité Laval's Stephen Gor­don and Mcgill Univer­sity's Christo­pher Ra­gan last month or­ga­nized a con­fer­ence on the 2021 man­date re­newal hosted by the Max Bell School of Pub­lic Pol­icy, which Ra­gan leads. The re­sult: a trove of in­sight on mon­e­tary pol­icy that is avail­able to ev­ery­one with ac­cess to the in­ter­net. (Dis­clo­sure: I par­tic­i­pated in a panel dis­cus­sion at the con­fer­ence.)

One nugget came from An­gela Redish of the Univer­sity of Bri­tish Columbia's Van­cou­ver School of Eco­nom­ics, who ze­roed in on how lower-for-longer in­ter­est rates have in­flated as­set prices, thereby widen­ing the gap be­tween those who are rich and/ or lucky enough to own prop­erty and stocks and those who aren't.

“Any mon­e­tary pol­icy, and any im­ple­men­ta­tion de­ci­sion, has dis­tri­bu­tional con­se­quences,”

Redish said. “I would like to see a semi-an­nual re­port that talks about how mon­e­tary pol­icy has had con­se­quences for in­come dis­tri­bu­tion … some for­mal recog­ni­tion by the bank that it's de­ci­sions have con­se­quences for in­come and wealth dis­tri­bu­tion.”

The sub­ject of in­equal­ity tends to cause cen­tral bankers some dis­com­fort. Their busi­ness was once sim­ply to raise or lower in­ter­est rates, while dis­tri­bu­tional is­sues were less ob­vi­ous. But the de­ci­sion of the U.S. Fed­eral Re­serve, Euro­pean Cen­tral Bank and Bank of Eng­land to em­brace quan­ti­ta­tive eas­ing (QE) — cre­at­ing money to pur­chase bonds and other fi­nan­cial as­sets — to fight the Great Re­ces­sion made the side-ef­fects dif­fi­cult to ig­nore. Ar­rest­ing that down­turn was good for ev­ery­one, but some did far bet­ter than oth­ers.

Canada avoided QE a decade ago, but as the lock­downs as­so­ci­ated with the COVID-19 pan­demic trig­gered the big­gest eco­nomic col­lapse since the 1930s, the Bank of Canada be­came one of the world's most ag­gres­sive users of it. Tiff Mack­lem, the gov­er­nor, in­sists the jury is still out on whether mon­e­tary pol­icy is widen­ing the in­come gap.

“It is true that QE works through many chan­nels, in­clud­ing fi­nan­cial port­fo­lios, that may boost wealth in­equal­ity,” Mack­lem said in Septem­ber. “But as re­search on the ex­pe­ri­ence with QE in the United States and euro area high­lights, QE can also re­duce in­come in­equal­ity. We will con­tinue to study and mon­i­tor all the ef­fects of QE.”

That sort of equiv­o­ca­tion will in­vite rough treat­ment the next time Mack­lem ap­pears on Par­lia­ment Hill.

Con­ser­va­tives are skep­ti­cal of QE. Op­po­si­tion leader Erin O'toole said in the man­i­festo that helped him win his job in Au­gust that the “mas­sive amounts of money the Bank of Canada printed raise the risk of in­fla­tion and higher debt ser­vice costs.”

Pierre Poilievre, the party's fi­nance critic, has added an­other di­men­sion to his boss's cri­tique, telling Bloomberg News in an ar­ti­cle pub­lished on Thurs­day that “ex­pand­ing the bank's bal­ance sheet dur­ing a short-term, once-in-a-life­time pan­demic lock­down is dif­fer­ent than per­pet­u­ally buy­ing and in­flat­ing the fi­nan­cial as­sets of the wealthy at ev­ery­one else's ex­pense.” He also said the Bank of Canada should “stay out of po­lit­i­cal and ide­o­log­i­cal de­bates and stick to its job, which is in­fla­tion tar­get­ing.”

The Max Bell School con­fer­ence heard sim­i­lar sen­ti­ments from par­tic­i­pants who hold a more ortho­dox view of mon­e­tary pol­icy. They fret that the pub­lic has come to ex­pect more of cen­tral banks than the in­sti­tu­tions can rea­son­ably de­liver. Demo­cratic law­mak­ers in the U.S. this sum­mer in­tro­duced leg­is­la­tion that would add re­duc­ing racial em­ploy­ment gaps and nar­row­ing in­come in­equal­ity to the Fed's mis­sion. The old guard wor­ries that such ideas could spread

north.

“How far should we push the cen­tral bank?” asked John Mur­ray, a for­mer deputy gov­er­nor at the Bank of Canada who is now an ad­junct pro­fes­sor in the eco­nom­ics depart­ment at Queen's Univer­sity in Kingston, Ont. “I do worry that this is get­ting to be an ever-ex­pand­ing list in­stead of mind­ing your knit­ting, as my grandmothe­r used to say.”

But what if Redish is onto some­thing? The In­ter­na­tional Mon­e­tary Fund last month pub­lished a staff re­search pa­per that ar­gues cen­tral bankers should make a point of con­sid­er­ing in­equal­ity when they set in­ter­est rates.

Niels Jakob Hansen, Alessan­dro Lin and Rui Mano cre­ated a lab­o­ra­tory set­ting in which the busi­ness cy­cle was driven by tech­no­log­i­cal in­no­va­tion, which mir­rors the eco­nomic growth dy­nam­ics of the past decade or so. A rich per­son owned the cap­i­tal, and a poor per­son didn't. Their model pro­duced bet­ter out­comes when in­ter­est rates were low­ered to boost wages than when rates were left higher due to a me­chan­i­cal re­sponse to in­fla­tion.

One pa­per by a trio of younger re­searchers won't — and shouldn't — trump the con­cerns of a vet­eran pol­icy-maker such as Mur­ray. But there is a dis­cus­sion to be had. The fi­nance com­mit­tee, of which Poilievre is a long­time mem­ber, was ab­sent dur­ing the Bank of Canada's last pol­icy re­view. Time for it to wake up.

DAVID KAWAI/ BLOOMBERG

Tiff Mack­lem, gov­er­nor of the Bank of Canada, speaks at a Global Risk In­sti­tute event last week. Mack­lem in­sists the jury is still out on whether mon­e­tary pol­icy is widen­ing the in­come gap af­ter the pan­demic trig­gered ex­ten­sive lock­downs.

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