Canada’s Money Targeting Experiment

Like many countries, Canada experienced historically high inflation rates in the 1970s. At the start of 1975, inflation topped 10 percent. In response, Bank of Canada Governor Gerald Bouey announced in November of that year the policy which became known as gradualism: The Bank would target the growth rate of the narrowly defined monetary aggregate M1, made up of currency plus demand deposits at chartered banks. Over time, the Bank would set gradually declining M1 growth rates (for these target ranges and actual M1, see figure 1). The idea was that as the Bank met its early M1 growth targets, it would win credibility for its later targets and would be able to break both high inflation and high inflation expectations without increasing unemployment.