Through the adjustment of expectations, the monetary authority has the opportunity to better offset fluctuations in the level of output or inflation.
This expectations channel of monetary policy has always been at work, but as its existence has become better appreciated, its influence might have become greater as well.3 We can see a clear illustration of its importance in the conditional commitment the Bank of Canada used during the financial crisis – one of three types of potential unconventional monetary policy tools at its disposal.4 In April 2009, the Bank stated that it would maintain the policy interest rate at 0.25 per cent from April 2009 to mid-2010, conditional on the outlook for inflation.