Central banks may have to find new ways to steer monetary policy and prevent new crises, perhaps changing the ways they look at price levels, the head of the Bank of Canada said on Saturday.
Stressing that his musings had no impact on current Canadian monetary policy, Governor Mark Carney told bankers at Jackson Hole, Wyoming, that central banks needed to understand the dynamics of the financial system better than at present.
There is an emerging consensus that price stability does not guarantee financial stability and is, in fact, often associated with excess credit growth and emerging asset bubbles, he said.
There is also general agreement that the first line of defense should be better regulation, including new macroprudential tools.
The Bank of Canada has long been an enthusiastic user of inflation targets, and Carney stressed that the target of year-on-year consumer price inflation of around 2 percent will stay in force until the end of 2011, as planned.
But the bank is also studying such options as targeting price levels rather than targeting inflation itself, and it has frequently called for co-operation and enhanced regulation.
Price stability should be retained as the central objective of monetary policy, although its definition may have to change, Carney said. The Bank of Canada released his speech ahead of time under embargo.
Price stability ... has generally been coincident with sustainable growth in output and employment.