inimises the unemployment costs of disinflation.” Yet, this appears to be more plausible in theory than in practice. As a case in point, the Bank of Canada has argued that the country’s “inflation could not have been minimised without a short-term rise in unemployment and government debt.” Thus, they concede that there are indeed short-term costs, although they hope that they will be outweighed by the long-term benefits. According to this view, benefits will accrue because of Canada’s resultant low-inflation environment, which will promote both the stability and competitiveness of the Canadian economy. This should result in a protracted increase in business investment. Yet, the economy continues to feel the short-term effects. It seems as though the short term is actually a very long one.Not surprisingly, this lag time has engendered a host of critics of such a narrow monetary policies. Perhaps most notably, P. Krugman has argued that while the belief that absolute price stability is a ‘huge blessing’ with large benefits and few drawbacks, the concept rests entirely on faith. Empirical evidence actually indicates the opposite. The benefits of price stability are elusive and the costs of achieving it are large. And zero inflation may not be a good thing even in the long run. Critiques focused specifically on the Bank of Canada’s policy further argue that the Bank has been overly obsessed with reducing inflation to the detriment of other concerns. Bringing down inflation in the early 1990s required a harsh contractionary monetary policy, with extremely high short-term interest rates. For these observers, the Bank’s tight monetary policy was badly mistimed, since it was applied during the recession of the early 1990s and the precarious recovery that followed. Critics also suggest that the Bank of Canada’s policy surely has important long-run costs. Their argument re...
