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Natural Hazards: Some Pitfalls on the Path to a Neutral Interest Rate

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  • David Laidler

    (C.D. Howe Institute)

Abstract

The Bank of Canada currently expects the Canadian economy to return to full employment by the middle of next year, but is in no hurry to begin raising the overnight interest rate from its currently extremely low level towards the 3 percent plus range that normally has been associated with full employment. Some of the Bank’s critics have stressed that if inflation is to be kept stable after next year, then a “neutral” value for real – that is inflation-adjusted – market interest rates must be restored by then. The neutral interest rate’s value is hence extremely difficult to estimate, making other policy indicators highly relevant. Recent survey data on business intentions and expectations have shown more signs of expansion lately, but, along with still subdued rates of money growth, they do not as yet signal any imminent threat of an upsurge in long-term inflationary pressures in Canada, and these factors suggest that there might be something to be said for the Bank of Canada’s current caution towards raising interest rates.

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Bibliographic Info

Article provided by C.D. Howe Institute in its journal C.D. Howe Institute Backgrounder.

Volume (Year): (2011)
Issue (Month): 140 (July)
Pages:

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Handle: RePEc:cdh:backgr:140

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Related research

Keywords: Monetary Policy; Bank of Canada; inflation; neutral interest rate; Canadian economy;

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References

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  1. Laidler,David, 1999. "Fabricating the Keynesian Revolution," Cambridge Books, Cambridge University Press, number 9780521641739, April.
  2. A. Cohen & G. Harcourt., 2009. "Whatever Happened to the Cambridge Capital Theory Controversies?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
  3. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
  4. Philippe Bergevin & David Laidler, 2010. "Putting Money Back into Monetary Policy: A Monetary Anchor for Price and Financial Stability," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 312, October.
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Cited by:
  1. Paul R. Masson, 2013. "The Dangers of an Extended Period of Low Interest Rates: Why the Bank of Canada Should Start Raising Them Now," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 381, May.
  2. Ronny Mazzocchi, 2013. "Scope and Flaws of the New Neoclassical Synthesis," DEM Discussion Papers 2013/13, Department of Economics and Management.
  3. Paul Beaudry & Philippe Bergevin, . "The New "Normal" for Interest Rates in Canada: The Implications of Long-Term Shifts in Global Saving and Investment," e-briefs 156, C.D. Howe Institute.

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