The selection of a properly instituted framework for fiscal and monetary policies presents a challenging task for the economic authorities involved. Over the decades, major changes have occurred concerning the implementation of fiscal and monetary policies. For instance, policies targeting sound objectives have been introduced in the developed countries such as Canada. The sound objectives have been developed after years of fine tuning both monetary and fiscal policies. Among the developed nations that include Canada, the responsible economic authorities have continuously embraced monetary and fiscal policies that target the reduction or stabilizing inflation. This attempt is aimed at ensuring that there is fiscal sustainability in both short term and long term basis, respectively. On the same note, the main objective of the continuous monetary and fiscal policy reforms in Canada is to ensure there is an emphasis on sound and strong economic development. On the other hand, among the debates on macroeconomic policy in Canada involves whether it is necessary to stabilize the economy by monetary and fiscal policymakers (Lange, 2013).
About two decades ago, both the Bank of Canada and the Federal Government reached a consensus regarding how to control inflation. Consequently, the Federal Government developed a framework geared to minimizing fiscal deficit. Previously, the credibility of policies targeting monetary and fiscal policy in Canada was not highly regarded. As such, it was necessary for the Government to show resolve in terms of achieving a convincible fiscal control and lower inflation to gain credibility. In some instances, it was necessary to establish credibility by overriding automatic stabilizers associated with fiscal policy. On the other hand, for monetary policy, the policy makers had sometimes to avoid implementing the easing guaranteed by the Government’s inflation targets. As the targets became realizable, public trust also improved which is important in gaining credibility concerning the implemented monetary and fiscal policies. Where the credibility of the implemented policies associated with both fiscal and monetary is established, it is easier for the stabilizers to carry out their roles (Rodriguez, 2008).
In bringing down the inflation rate to a manageable level within a period of probably, 24months, the monetary policy is critical. In Canada, the monetary policy is important in terms of promoting economic stability as a counter to the shocks of demand and supply. For instance, a shift in demand, there is a need for a clear direction with regard to policy interest rate. In an attempt to bring the inflation rate to a manageable level, the Bank of Canada often engage in lowering its target with regard to interest rate. Such an action by the Bank of Canada plays a role in increasing output level in Canada’s economy and enhances production potential. The framework that the Bank of Canada adopts in inflation targeting that facilitates a subtle supply shocks. These supply shocks are often ignored provided they do not affect the inflation expectations. In most cases, monetary policy does not have an adverse effect in terms of turning temporary supply shocks into a destabilizer for the general output (Rodriguez, 2008).
What the Federal Government or the Bank of Canada can do in the subsequent year is to have well-defined objectives related to monetary and fiscal policy. Furthermore, there is a need for accountability in terms of meeting the defined objectives. On the same note, a clear framework for policy co-operation and stabilization will be necessary. The co-operation needs to involve the sharing information between the Federal Government and the Bank of Canada. This co-operation is important in terms of enhancing monetary and fiscal credibility. Furthermore, the relative effectiveness of both monetary and fiscal policies needs to be an on-going debate among policy makers. This is necessary for finding appropriate measures for economic recovery (Lange, 2013).
The Bank of Canada should aim at reducing inflation
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