OTTAWA - Any encouraging signs the economy is finally coming out of its tailspin could be snuffed out unless the Bank of Canada takes a bolder and more aggressive approach to credit markets, says a leading expert on monetary policy.

Economist David Laidler, a member of the C.D. Howe monetary policy council and an early advocate of an inflation targeting approach eventually adopted in Canada, says central bank governor Mark Carney should pump up the money supply next week, not just talk about it.

Carney is due to unveil his thinking on so-called quantitative and credit easing -- whereby the bank creates money and uses it to buy up assets such as government bonds, thereby freeing up funds for more productive economic activities.

In a recent speech, Carney stressed that while he will unveil options next Thursday, he hasn't decided whether to use the non-traditional monetary stimulus, which is being tried with varying success in the United States, the United Kingdom and Japan.

But Laidler is calling on Carney to act boldly and not worry about potential long-term consequences, such as overshooting inflation targets by flooding the market with too much money.

"The economy has contracted so far and inflation expectations are coming down so fast that there is room for making mistakes on the expansionary side for awhile," Laidler said.

"The balance of risks are not even. The balance of risks on the economy are all on the downside, so you can afford to be a bit more pushy."

In a five-page paper for the Toronto-based C.D. Howe, a private-sector economic think-tank, Laidler argues that traditional monetary policy of attacking interest rates has produced at best modest stimulus for the economy.

He expects Canada's economy to contract by three per cent this year, with an inflation rate below one per cent.

Laidler's paper notes there has been some encouraging signals in the economy in the past few weeks -- referred to as green shoots -- but they need help to survive and spread.

"Without such continued monetary irrigation, any green economic shoots that do appear will quickly wither," the paper predicts.

The analysis was published on the same day that one of those green shoots -- the return of the U.S. shopper -- came a cropper in March, with a report that retail sales fell 1.1 per cent.

It was the biggest dip in three months, dealing a blow to hopes the economy's fall might have hit bottom.

Scotia Capital's Derek Holt says both the Canadian and the U.S. economies are still being held back by tight credit conditions forcing businesses and consumers to the sidelines.

The problem is most acute in the U.S., but real interest rates remain relatively high also in Canada, explained Holt. And although Canada has a functioning banking system, its secondary and non-bank credit sectors are severely impaired.

"It would suggest what is needed is a smaller-scale, almost niche style of quantitative easing by the Bank of Canada, as opposed to the (US) Fed's approach, which is to almost buy everything," he said.

A March survey of lenders by the Bank of Canada released Monday described credit markets as tightening, with a record 82 per cent of loan officers citing the cost of borrowing as high in relation to base rates.

Laidler says with the closing up or curtailment of many channels for obtaining credit, the best way the central bank can help the economy is to ensure there is enough money in the system that individuals and business can obtain loans to spend and invest, thereby increasing demand and production.

In any case, after chopping the bank target overnight rate from 4.5 per cent to the current record 0.5 per cent in just over a year, Carney has all but emptied the chamber on influencing interest rates by traditional means.

"In normal times, you can get the effects you want by varying the overnight interest rates, but we're not in normal times, so you've got to do something else," Laidler said.

He adds that Canadians shouldn't be overly spooked by the exotic sounding "quantitative easing" phrase, or about inflation.

"This is just carrying on the same old policy, but by other means," he said.

As for inflation, "I don't see it around the corner," he added, saying if the central bank does overshoot with the money supply, it will have plenty of time to pull back on the reins.