CHAPTER 18 The Conduct of Monetary Policy: Strategy and Tactics 489 about the impact of inflation targets on actual economic performance in Canada We really require a longer period of time for targets to demonstrate their ability to deal successfully with the peak of an economic upturn without the trend of inflation moving persistently outside the target range From Opaqueness to Openness and Accountability The historical record of the Bank of Canada s conduct of monetary policy reveals that during the 1960s and 1970s, the Bank operated in an environment characterized by instrument and goal opaqueness The use of multiple instruments and goals tended to shield the Bank from scrutiny and accountability; the public was not able to comprehend the Bank s actions, allowing the accountability of the Bank of Canada to deteriorate Over the past decade, however, as John Chant, a former Special Adviser at the Bank of Canada, recently put it the Bank of Canada has transformed its conduct of monetary policy by focusing on an explicit inflation-control target, establishing a Governing Council for decision-making, announcing a target overnight interest rate, and adopting fixed action dates for making policy changes These changes (and in particular the adoption of inflation targets) have moved the Bank away from opaqueness, towards openness and accountability Pre-emptive Strikes Against Economic Downturns and Financial Disruptions The recognition that monetary policy needs to be more forward looking has prompted the Bank of Canada to be more pre-emptive The Bank has not only engaged in pre-emptive strikes against a rise in inflation, but it has acted preemptively against negative shocks to aggregate demand and especially to those associated with financial disruptions With the onset of the financial crisis in August 2007, the Bank of Canada began to ease policy even in the face of a strong economy with growth close to 3% in the third quarter of 2007, unemployment below 6%, and inflation rising because of the increase in energy prices The potential for the financial disruption to weaken the economy and to produce an adverse feedback loop in which credit markets would worsen and weaken economic activity, which in turn would further weaken credit markets encouraged the Bank of Canada to take pre-emptive action, cutting the overnight interest rate by 25 basis points in December of 2007 to 4.25% Subsequent easing of monetary policy lowered the overnight funds rate to 0.25% by April of 2009 At the same time, the Bank of Canada implemented large liquidity injections into the credit markets to try to get them working again (as discussed in the previous chapter) These pre-emptive attacks against negative shocks to aggregate demand were particularly successful in the past in keeping economic fluctuations very mild The magnitude of the financial disruption during the recent financial crisis, however, was so great that the pre-emptive actions by the Bank of Canada were not enough to contain the crisis, and the economy suffered accordingly Gordon G Thiessen, The Canadian Experience with Targets for Inflation Control, Canadian Public Policy 24 (1998), p 425 For a more detailed discussion of Canada s experience with inflation targets, see also Charles Freedman, Inflation Targeting and the Economy: Lessons from Canada s First Decade, Contemporary Economic Policy 19 (2001), pp 19, and Ben Bernanke, Thomas Laubach, Frederic Mishkin, and Adam Posen, Inflation Targeting: Lessons from the International Experience (Princeton: Princeton University Press, 1998) John Chant, The Bank of Canada: Moving Towards Transparency, Bank of Canada Review (Spring 2003): 13