Trade liberalization making life difficult for central bankers: Poloz

OTTAWA — The Bank of Canada’s governor says greater trade integration around the world has created challenges that central bankers cannot afford to ignore.

In a university lecture Sept. 26 in Bellingham, Wash., Stephen Poloz says the evolution of trade liberalization can affect economic models and decision-making processes that policy-makers rely on.

He says increased integration can make an economy less sensitive to exchange-rate movements and make domestic inflation more dependent on international factors.

Speaking to an audience at Western Washington University, Poloz says deeper integration can also make maintaining inflation targets more difficult.

He says Bank of Canada simulations suggest economic models that fail to recognize rising integration are likely to predict that some monetary-policy responses will be more effective than they prove to be in practice.

Poloz says a central bank that relies too much on such a model would tend to react too gradually and maybe even insufficiently to external economic shocks.