Banking, Trade and Commerce
Motion to Authorize Committee to Study the Need to Review the Bank of Canada Act--Debate Adjourned
November 19, 2020
Pursuant to notice of September 30, 2020, moved:
That the Standing Senate Committee on Banking, Trade and Commerce, when and if it is formed, be authorized to examine and report on the need to review the Bank of Canada Act in order to:
(a)specify that the Bank of Canada’s mandate covers not only price stability, but also the pursuit of maximum employment or full and productive employment, as is the case in the United States, Australia and, recently, New Zealand;
(b)provide for transparency measures regarding the procedure and choice of indicators for the setting of the key policy interest rate, as well as analyses of how the conduct of monetary policy affects the inflation rate, employment and income distribution, and report to Parliament; and
(c)propose to the Minister of Finance items to be included in the five-year agreement between the Bank of Canada and the Government that is to be signed in 2021; and
That the committee submit its final report to the Senate no later than March 31, 2021.
She said: Honourable senators, I will try to be brief. I have no intention this evening of repeating everything I said in March about this motion that proposes, notwithstanding the comments made earlier by Senator Downe, that the Standing Senate Committee on Banking, Trade and Commerce be authorized to study the need to review the Bank of Canada Act, review the Bank of Canada’s mandate, propose items to be included in the five-year agreement between the Bank of Canada and the government, and add provisions on transparency regarding the way the Bank of Canada sets the interest rate. That is the motion in short.
In some previous speeches I explained why it is important for the Standing Senate Committee on Banking, Trade and Commerce to study this issue. As you know, the five-year agreement that has been signed since 1991, is set to expire and has to be renewed in 2021.
This five-year agreement has practically not changed since it was initially signed in 1991. The letter has changed, but the essence of the agreement provides that Canada’s monetary policy target an inflation rate of 2% on average, or the median between 1% and 3%. The agreement specifically mentions that the Bank of Canada’s mandate is to control inflation.
As you know, I would like us to study the issue of reviewing and broadening the mandate of the Bank of Canada. Three new events have taken place since last March and I would like to draw your attention to them this evening. These events add credence to the need for this study to be conducted by the Standing Senate Committee on Banking, Trade and Commerce.
The first event concerns a study carried out by the Bank of Canada that led to a virtual conference of experts on August 26, entitled “Towards the 2021 Renewal of the Bank of Canada’s Monetary Policy Framework.”
I attended this conference, which was very interesting, and the research results are very clear. There was a simulation comparing different monetary policy framework scenarios. For example, there was a comparison of the current dual mandate scenario and the scenario targeting nominal GDP. The bank calls this simulation a “horse race,” with each scenario representing a horse. The Bank of Canada concluded that the dual mandate scenario gave very good results.
I will quote in part the conclusion of the Bank of Canada officials.
Among the full set of frameworks, IT, AIT and the unemployment-inflation dual mandate stand out as the most robust of the frameworks in the horse race.
In other words, the bank was saying that, if we had a monetary policy framework with a dual mandate, we would have obtained excellent results. A number of experts spoke at that conference, including economist Pierre Fortin, who gave a presentation in which he said that, if the unemployment rate is generally lower in the United States than in Canada, it is because the United States has had a dual mandate since 1976.
That is the first event that I wanted to point out and that we must take into consideration in this study on the Bank of Canada.
The second event, which took place from September 22 to 25, 2020, is the conference entitled Choosing the Right Target: Real Options for the Bank of Canada’s Mandate Renewal, which was hosted by McGill University’s Max Bell School of Public Policy.
I was invited to be part of the last panel along with the former governor of the Bank of Canada and economist, David Dodge, and other economists from universities, the Bank of Canada and other American regional central banks in order to share my views on the presentations I had heard.
The conference participants were invited to argue for alternative frameworks. Some argued that we should perhaps raise inflation targets, while others said that we should reduce them or that we should target nominal GDP or asset price stability. Obviously, others supported maintaining the status quo or adopting the dual mandate.
What came out of this conference, and which I found very interesting, was the principle of credibility, which was identified as a fundamental factor in the selection of a monetary policy framework. The principle of credibility is based on expectations surrounding targets for results. Participants explained that the results or the success of the old framework, the current framework we have been using since 1991, can be explained by the fact that it allowed the anchoring of Canadians’ rational expectations around an inflation target of 2%. In other words, over the past 30 years, the credibility of the current mandate has resulted in Canadians factoring into their ongoing behaviour and intertemporal contracts the idea that inflation will remain around 2%, which is a good thing. This means that it would not be a good thing to change the target because the 2% rate of inflation is well anchored in expectations.
However, a problem of credibility now emerges. When we examine the situation in light of the Bank of Canada’s current mandate, we see that the current economic context in Canada is very different from the economic context that gave rise to the current framework back in 1991.
In the early 1990s, inflation was still a threat, so it was important to convince Canadians that the Bank of Canada had things under control, that it was aiming for a specific target, and that it was going to tweak the key interest rate to achieve that target.
The context is different now. On the one hand, inflation is no longer a threat. On the other hand, we can have very low unemployment rates without driving inflationary pressure. Even though the situation is different now with COVID, things will stay the same after COVID-19. There will be a slow recovery, with a labour market that will need incentives. That is why the concept of a dual mandate that would add another factor, the objective of maximum employment, to the inflation target, is much more credible than the bank’s current mandate.
As you know, for several years now the Bank of Canada has had no choice but to try to stimulate the economy, and it is very difficult for the bank to justify this stimulative monetary policy under the current inflation-targeting mandate. In order to justify its monetary policy, the Bank of Canada has to say that inflation is not rising enough and that the economy needs to be stimulated.
As I’m sure you can imagine, when people do their grocery shopping and see the ever-increasing cost of food, this way of formulating monetary policy does not seem very credible. The dual mandate is therefore a much more credible mandate, because it adds another target to the current one, and it makes it easier for the Bank of Canada to justify its monetary policy.
The third and final event I wanted to mention that has happened since March is the publication of research conducted by some researchers at the Bank of Canada. This research evaluates monetary policy frameworks and evaluation processes in several countries, comparing Canada to the United States, Sweden, New Zealand and England. This is fascinating because according to this research, the various processes show that there might be reasons to suspect the existence of a democratic deficit surrounding the renewal and revision of monetary policy in Canada.
That is the subject that I would like the Standing Senate Committee on Banking, Trade and Commerce to study because, elsewhere in the world, the assessment of the monetary policy isn’t necessarily carried out by the central bank itself. Often it is done by independent parties.
What’s more, the monetary policy targets are often defined by the government in partnership with the central bank, but not by the bank alone. In Canada, the bank chooses the targets that it would like the government to adopt.
In this context of a possible democratic deficit, there is also the fact that Canada is almost the only country that does not have a monetary policy committee. New Zealand recently amended its legislation to create a monetary policy committee made up of the governor of the bank and others so that it can explain and choose the policy rates that will be targeted by the central bank.
My speech may have been a bit technical, but I presented some ideas that will provide grist for the mill for those who are interested in the subject. I hope that we can quickly get to work on this at the Standing Senate Committee on Banking, Trade and Commerce.
I therefore took this opportunity to move my motion today. Thank you.
Senator Boyer, before you begin, I must caution you that I will have to interrupt you at nine o’clock.