Why Is Canada's Price Level So Predictable?


  • The authors gratefully acknowledge comments and contributions by Tamim Bayoumi, Michel Juillard, Troy Matheson, two anonymous referees, and seminar participants at the IMF and the Department of Finance, Canada, as well as excellent research assistance provided by Volodymyr Tulin.


This paper draws attention to the fact that the price level in Canada—which is an inflation targeter—has strayed little from the path it would have taken had inflation never wandered off the 2% target since its introduction and has tended to revert to that path after temporary deviations. Econometric analysis using Bayesian estimation suggests that a low probability can be assigned to explaining this behavior by mutually offsetting shocks. More plausible is the assumption that inflation expectations and interest rates are determined in a way that is consistent with an element of price-level-path targeting.