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In 1991, the Bank of Canada became the second central bank in the world to formally adopt an inflation targeting framework, setting a specific goal of maintaining inflation at 2%.

Bank of Canada's Adoption of Inflation Targeting

Figure 5.6 is a chart that plots the inflation-stabilizing (equilibrium) unemployment rate, the actual unemployment rate, and the inflation rate for Canada for the period from 1985 to 2022.

Figure 5.6: Unemployment, NAIRU, and Inflation in Canada (1985–2022)

In 1991, a major central bank formally adopted a policy framework with the primary goal of keeping inflation at a 2% target. Analyze the fundamental economic trade-off this central bank would face if it tried to bring inflation down to its 2% target during a period of significant economic slowdown and rising joblessness.

Analyzing Monetary Policy Trade-offs

The Bank of Canada's 1991 decision to formally announce and commit to a 2% inflation target was a significant policy shift. Which of the following best analyzes the primary economic rationale behind this strategy?

In late 1990, two economists are debating a proposed new framework for Canada's central bank. Read their arguments below and evaluate their positions. Which economist's argument better reflects the primary long-term objective that underpinned the central bank's 1991 policy shift? Justify your choice.

Evaluating the 1991 Inflation Targeting Decision

True or False: The primary reason the Bank of Canada formally adopted a 2% inflation target in 1991 was to prioritize short-term reductions in unemployment over price stability.

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