Inflation targeting and the economy: Lessons from Canada's first decade

Inflation targeting has become the centerpiece of the monetary policy frame work in a number of industrial countries and emerging economies. The first part of this article examines the Canadian experience with inflation target ing since its introduction in early 1991 and various issues that require re solution in establishing such a framework. It also examines the way inflati on targets deal with demand, price, and productivity shocks. The second par t focuses on Canada's economic performance during the 1990s. Factors other than monetary policy-most notably private sector restructuring and the fisc al situation in the first half of the decade-played an important role in th e sluggishness of the recovery from the recession of 1990-91. Trend growth in Canada during the 1990s was lower than in earlier periods and than U.S. trend growth over the same period The article examines the role of such fac tors as productivity growth and participation rates in explaining the diffe rences. I conclude that a good monetary policy is necessary but not suffici ent for good economic outcomes. (JEL E52, E58, E65).