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Livio Di Matteo: The real issue in the Bank of Canada’s mandate debate

Commentary

The debate regarding the renewal of the mandate of the Bank of Canada has been reduced to a divide between the current single mandate of price stability—defined as keeping the annual inflation rate close to two percent—and a dual mandate combining price stability as well as economic performance, commonly measured by some type of business cycle measure such as full employment.

In some respects, this version of a dual mandate is really a return to the short-run policy trade-off between inflation and unemployment that characterized macroeconomic policy prior to the 1980s. This debate comes at a tumultuous economic time in which there are supply shocks, an expansion of the money supply to deal with the economic downturn of the pandemic, large deficits, and now to complicate things further, an inflationary upsurge that may or may not be transitory.

It remains that the role of the Bank of Canada as gleaned from the preamble to the Bank of Canada Act provides for a very broad interpretation of its role and mandates:

“WHEREAS it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada, ….”

In other words, the mandate of the Bank of Canada broadly defined includes mitigating fluctuations not just in prices—a price stability mandate—but in the national currency, trade, employment, and in general anything that might affect the economic and financial welfare of Canada. This can even include inequality or climate change.

Over the years, the Bank of Canada’s activities and preoccupations have indeed evolved to reflect the economic conditions and problems of the era; whether it was managing wartime debt, the boom of the post-war era, the value of the Canadian dollar at a time when we had fixed rather than flexible rates, the move to flexible rates, slowing economic growth and rising unemployment and inflation in the 1970s and 1980s, periodic financial crises and recessions in 1973-74, 1981-82, 1990-91 and 2008-09, and of course the relentless pace of globalization and technological change which also affected financial markets.

The outlook of the Bank of Canada in dealing with the economic world on behalf of Canadian economic interests has always been multi-dimensional, but in the wake of the experience of the 1970s and 1980s, the focus of the Bank has been on price stability. Indeed, the current emphasis on price stability has been a feature since the late 1980s when Governor John Crow explicitly set out price stability as the primary goal of monetary policy and inflation targets became the benchmark. The Bank’s objective was clear and the instruments of monetary policy—interest rates, money supply, and moral suasion—were all directed towards the clear objective of price stability. Moreover, this direction was not pursued in splendid isolationism but was a policy pursued by major central banks globally.

In the end, the Bank of Canada is limited in the number of tools or instruments available to pursue its objectives.

What changing the mandate really means is trading a clear objective—with all the necessary monetary tools available to meet that objective—for a set of multiple objectives which will require trade-offs and tools that may operate at cross-purposes. In the end, the Bank of Canada is limited in the number of tools or instruments available to pursue its objectives, and adding more targets than available instruments sets the stage for clashing policies and outcomes. Clear operating definitions aside, monetary policy that targets inflation alone is much simpler than one that tries to balance inflation with unemployment, economic growth, inequality, and climate change.

Raising interest rates to fight inflation could lead to unemployment or a reduction in investment needed to fight climate change or an appreciation in the currency that hurts exports. In an odd sense, monetary policy risks becoming a sort of game of whack-a-mole as the emphasis of the day oscillates from interest rates to inflation to unemployment or inequality or worse—it becomes a game of cat and mouse with very few cats and an awful lot of mice.

It is simple to state that there should be multiple targets, but how exactly to prioritize those targets and then pursue them is a much more complicated matter. Moreover, with multiple targets, the conduct of monetary policy risks becoming more politicized as various interest groups and constituencies line up behind their preferred target and lobby politicians who will in turn place pressure on the central bank.

The biggest downside to moving away from a mandate with one clear objective is that politics can ultimately become much more important in the operations of the Bank of Canada. While the Bank of Canada is generally independent in the conduct of its monetary policy, the ultimate responsibility lies with the government under the joint responsibility approach developed in the late 1960s in the aftermath of the James Coyne Affair. A broader set of mandates will simply expand the interest of politicians in the conduct of Bank of Canada monetary policy.

Opinion: Canada needs a more ambitious agri-food policy

Commentary

Since 1867, Canadian agriculture has been one of two areas of joint federal-provincial-territorial jurisdiction. This has been both a blessing and a curse.

For most of that time, the two levels of government struggled with how to make the relationship work. Those struggles led governments to agree to the first Agriculture Policy Framework (APF) in 2003.

Almost 20 years later, the time has come to ask how the federal-provincial-territorial (FPT) policy framework can become a more strategic tool to support the agri-food system—a system that is responsible for one in eight Canadian jobs, seven percent of Canada’s GDP, $70 billion in exports, and is an essential tool in the fight against climate change.

The APF addressed concerns about program inconsistencies and inequities in federal spending across producers, regions, and commodities through five-year funding agreements.

But while the APF created stability, certainty, and relative equity, it should be properly characterized as a spending agreement. Governments themselves refer to it as a “$3 billion five-year investment.” The approximately $8 billion spent on business risk management programs over the agreement is an additional “investment.”

What the current agreement is not is a policy framework, in as much as one would expect a policy framework to define policy objectives or goals, a strategy through which to meet goals, and to generate programming solutions that implement a policy. These are important gaps and represent missed opportunities.

It is important to acknowledge the significant policy work and development that does go into the APF process. Across the country there are hundreds of officials that dedicate part or all of their time to the process. Ministers meet multiple times a year to offer political direction. Farm groups and other stakeholders engage in consultations and offer recommendations.

However, there are limitations to the status quo. Without a clear strategic element to the process, the renewal of five-year agreements ends up with high-level objectives such as “growing trade,” “advancing science and innovation,” and “supporting public trust.” Changes are biased toward tweaks or minor variations to the existing programming set, or, conversely, any significant changes are spread across broad programming areas, often driven more by tightening budgets than by changes in strategic direction.

A deep analysis and consultation should guide the renewal of a multi-billion dollar five-year agreement. This analysis should focus on the challenges and opportunities facing Canada’s agri-food system, including how its position, international customers, and competitors have changed. Not to mention how stakeholders’ preferences and aspirations—including farmers, processors, and consumers—have evolved. The analysis should be made public and be consulted on. It should also include a clear set of objectives, with targets, by which performance can be assessed and accountability encouraged.

The expectations for agriculture and food have never been greater.

The agri-food system would benefit from a renewed approach that builds on the existing spending agreement. A first step would be to have FPT governments develop terms of reference to establish a more strategic agenda to guide the current funding agreement.

This process should articulate objectives, again with measurable targets for the coming five years, a strategy for achieving them, and analysis/consultation of policy alternatives with programming concepts. The outcomes could then be reviewed and renewed through a public process.

The expectations for agriculture and food have never been greater. The time is right to make the existing framework more ambitious and transparent with agri-food policy development. Governments have set targets for exports and domestic sales, greenhouse gas emission reduction and biodiversity, food security, and more. The risks facing the sector, from erratic international market access and farm prices, increasing input costs, and shifting weather extremes have never been greater. The pressure to obtain new and renewed investment in agri-food processing is sobering.

In certain ways, governments have benefited from changes brought on by the pandemic. The business-as-usual approach was replaced by a need to get things done. In agri-food, for instance, long-standing barriers to both interprovincial meat trade and access to the international workforce critical to Canada’s domestic food supply were overcome by necessity.

No single level of government is responsible for turning these challenges into opportunities, and no single level of government can act independently. Therefore, FPT governments need to continue with a collaborative, solution-oriented mindset to deliver a genuinely national agri-food policy that can drive the public and private investments necessary for the agri-food system to thrive.

Canada experienced 150 years of challenging agri-food policy development. The APF was a step in the right direction. Now almost 20 years later the time has come to take another step forward and make the APF a true, and truly ambitious, policy framework.

On November 15, CAPI will host a webinar to take the pulse of the FPT relationship, agriculture’s most underappreciated relationship. Find more here.