The effects consisted in public debt accumulation, which in turn led to increased risks in the country's interest rates.
And the chain of effects did not stop here. The situation continued with discouraged investments, especially where equipment and technology were concerned. This is a very important aspect, because of the fact that these factors directly influenced productivity.
In other words, without massive and continuous investments in equipment and technology, productivity cannot be improved. If productivity does not reach satisfactory levels at least, the general economic situation cannot improve. As a consequence, individual economic situation cannot be a satisfactory one either.
Even if matters seemed to be clear from this point-of-view, it took a while until Canada came to implement its current monetary policy that focuses on maintaining a small inflation rate. The country experienced different types of monetary policies, each of them having different impact on the country's economy.
It was not until 1988 that the Bank of Canada's Governor at the time realized that in order to diminish the negative impact on the country's economy the monetary policy has to consist in reducing the inflation level. The direct effect of reducing inflation consisted in achieving price stability.
Since that period, the country focused on implementing policies that were designed to reduce inflation and to maintain it at a low level. The measures that were taken during that period proved to be very efficient, given the fact that by 1992 Canada's inflation reached almost 2%.
Even so, the impact of the reduced inflation level was not a rapid one. The impact started to be noticeable after a slightly longer period of time because of the fact that the damage produced by high inflation rates was too strong to be counteracted on such a short period of time.
As a consequence, high interest rates were still maintained for a period of time, even if inflation had been reduced. But the government and the Bank of Canada were not the only agents involved in the country's economic recovery. Population played a very important role also.
The fact that the country's inflation was a low and predictable one...
This was not previously possible, during the times with high inflation and unstable economic environment. This has had a positive impact on the level of savings and investments.
This type of inflation increased the level of credibility in the monetary policy. This way, temporary changes regarding energy prices or exchange rate modifications do not affect other prices and wages in the same manner as these factors would be affected in a high inflation economy.
Another impact of low inflation consists in the fact that "it has helped the Canadian economy avoid the boom and bust cycles of the past. This is because the forward-looking framework of inflation targeting acts as an automatic stabilizer for the economy" (Dodge, 2002).
The Bank of Canada's vision on the monetary policy is quite a simplistic one. The Bank's officials consider that high inflation produces damages for the overall economy, while increasing costs for individuals and companies. It is also the Bank's opinion that in order to provide sustainable monetary policies, they have to be focused on the rate of inflation (Ragan, 2005). On short-term, it is expected that Canada's inflation rate will not suffer significant modifications (Reuters, 2009). The country's inflation targeting will probably help the Canadian economy to recover faster from any setbacks produced by the economic and financial crisis on global level.
Reference list:
1. Canada (2009). Central Intelligence Agency. The World Factbook. Retrieved June 11, 2009 from https://www.cia.gov/library/publications/the-world-factbook/geos/CA.html.
2. Dodge, David (2002). Bank of Canada. Governor of the Bank of Canada's Speech to the Canadian Society of New York. Retrieved June 11, 2009.
3. Ragan, C. (2005). The Exchange Rate and Canadian Inflation Targeting. The Bank of Canada. Retrieved June 11, 2009.
4. Phelps, Edmund (1970). Inflation Policy and Unemployment. MacMillan. Retrieved June 11, 2009.
5. Preview -- Canada March inflation seen weak but steady (2009). Reuters. Retrieved June 11, 2009 from http://www.reuters.com/article/companyNewsAndPR/idUSN1549816720090415.
