A Dual Mandate in 2026? Flexible Inflation Targeting is Better Says C.D. Howe Institute

May 13, 2025 – As the Bank of Canada and the Government of Canada prepare to negotiate the renewal of their agreement concerning the monetary control framework in 2026, a new C.D. Howe report maintains that the current framework – flexible inflation targeting – is a superior approach to a dual mandate.

In “Flexible Inflation Targeting Beats a Dual Mandate: Lessons for Canada’s 2026 Framework Renewal,” 2023 Purvis Prize-winning economists Jeremy Kronick, Steve Ambler, and Thorsten Koeppl make the case for the Bank of Canada to continue to have “low and stable inflation” as its official framework, and flexible inflation targeting as the means for achieving this goal.

“In the run-up to the Bank of Canada and the federal government’s renewal, the argument for the Bank to take on a mandate of both low and stable inflation, and maximum output and employment has gained traction – especially as we face a world with more supply shocks like tariffs,” explains Jeremy Kronick, the C.D. Howe Institute’s Vice-President of Economic Analysis and Strategy.

“However, the success of Canadian monetary policy over the last three decades is undeniable, and one would be hard-pressed to justify moving off of a renewal focused on 'low and stable inflation.'”

Kronick, Ambler, and Koeppl argue “low and stable inflation” using flexible inflation targeting should be the central pillar for the Bank for several reasons.

“First, looking at the long run, any attempt to systematically increase output and reduce unemployment through monetary policy will simply lead to more inflation,” adds Ambler, a Professor of Economics at Université du Québec à Montréal and the C.D. Howe Institute’s David Dodge Chair in Monetary Policy.

A dual mandate also relies too heavily on hypothetical concepts such as “maximum sustainable employment,” which cannot be directly measured and evolve over time.

“Estimating this is equivalent to estimating a moving target, meaning the central bank will never know for certain whether it has attained the maximum sustainable level of employment or output because shocks are constantly hitting the economy,” says Koeppl, Queen’s University Professor, and Scholar in Financial Services and Monetary Policy at the C.D. Howe Institute. “The Reserve Bank of New Zealand has actually backtracked from a dual mandate, and adding another goal to its mandate would open the Bank up to being vulnerable to government pressure to concentrate on boosting output.”

Kronick, Ambler, and Koeppl argue the Bank of Canada’s current policy framework – flexible inflation targeting – also allows the central bank flexibility. Notably, it recognizes the Bank is concerned with goals that are supplementary to its mandate, like output, and allows time to address how to get inflation back to target when a shock occurs.

They also argue that it was the anchoring of inflation expectations at 2 percent that allowed the Bank of Canada to bring inflation back to target as quickly as it did during the recent surge, and that in our current climate of uncertainty, including around trade, monetary policy focused on price stability can facilitate any major structural adjustments it may bring.

“Let’s not endanger a framework that ensures the Bank of Canada’s accountability and independence, allows for clear communication about monetary policy with the Canadian public, and has led to superior economic outcomes for households and businesses,” conclude Kronick, Ambler, and Koeppl.

Read the Full Report

For more information contact: Jeremy Kronick, Vice-President, Economic Analysis and Strategy, and Director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute; Steve Ambler, Professor of Economics, Université du Québec à Montréal and David Dodge Chair in Monetary Policy, C.D. Howe Institute; Thorsten Koeppl, Professor of Economics, Queen’s University, and Scholar in Financial Services and Monetary Policy, C.D. Howe Institute; Lauren Malyk, Manager, Communications, C.D. Howe Institute, 416-873-6168, lmalyk@cdhowe.org

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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