General discussion : challenges for monetary policy: new and old

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General discussion : challenges for monetary policy: new and old

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New Challenges for Monetary Policy, Symposium 1999 General Discussion: Challenges for Monetary Policy: New and Old Chair: Ian Macfarlane Mr. Macfarlane: Thank you very much, John. The floor is now open for questions on Meryvn s paper. First one here was Chuck Freedman. Mr. Freedman: I just have a couple of quick comments. First, although I am very fascinated by the notion of the potential use of price level targets in addition to or instead of inflation targets, one issue that I do not think is addressed either in Mervyn s paper or Lars paper is the question of which measure of prices should be used. This is less important when you are looking at inflation because the GDP deflator and CPI tend to move together. But if you actually look over periods of ten, twenty, or thirty years, the difference in price levels especially in economies that are producers of raw materials, some of which are represented here can be quite substantial. In the paper I gave at this conference three years ago, I calculated the ratio of the GDP deflator to the CPI for Canada, and there was about a 20 percentage points movement over a twenty-year horizon  first up and then down. That becomes very relevant. My second point is on policy rules. These have been developed for a closed economy by and large. There are a couple of papers, one by Lars, one by Larry Ball, which treats them in a small open economy. 69 But if they are to be treated more seriously for a small open economy, the role of the exchange rate has to be treated more explicitly. My third point is when we had a monetary aggregate target in Can- ada from 1975 to 1982, one reason for abandoning it was that the mon- etary aggregate we used, M1, had a very high interest rate elasticity. And that basically meant that when output and inflation picked up and M1 picked up, the extent of the needed interest rate rise, which of course came out of M1 increasing, was such that we did not have to ra

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