OTTAWA — Any encouraging signs the economy is finally coming out of its tailspin could be snuffed out unless the Bank of Canada takes a bolder and more aggressive approach to credit markets, says a leading expert on monetary policy.
Economist David Laidler, a member of the C.D. Howe monetary policy council and an early advocate of an inflation targeting approach eventually adopted in Canada, says central bank governor Mark Carney should pump up the money supply next week, not just talk about it.
Carney is due to unveil his thinking on so-called quantitative and credit easing — whereby the bank creates money and uses it to buy up assets such as government bonds, thereby freeing up funds for more productive economic activities.
In a recent speech, Carney stressed that while he will unveil options next Thursday, he hasn’t decided whether to use the non-traditional monetary stimulus, which is being tried with varying success in the United States, the United Kingdom and Japan.
But Laidler is calling on Carney to act boldly and not worry about potential long-term consequences, such as overshooting inflation targets by flooding the market with too much money.
“The economy has contracted so far and inflation expectations are coming down so fast that there is room for making mistakes on the expansionary side for awhile,” Laidler said.
“The balance of risks are not even. The balance of risks on the economy are all on the downside, so you can afford to be a bit more pushy.”
In a five-page paper for the Toronto-based C.D. Howe, a private-sector economic think-tank, Laidler argues that traditional monetary policy of attacking interest rates has produced at best modest stimulus for the economy.
He expects Canada’s economy to contract by three per cent this year, with an inflation rate below one per cent.