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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.

Suggested Citation

  • David Laidler, 2011. "Natural Hazards: Some Pitfalls on the Path to a Neutral Interest Rate," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 140, July.
    • Handle: RePEc:cdh:backgr:140
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    References listed on IDEAS

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    7. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
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    Cited by:

    1. Paul Beaudry & Philippe Bergevin, 2013. "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.
    2. 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.
    3. Yuli Radev, 2015. "New dynamic disequilibrium," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 65-90.
    4. Ronny Mazzocchi, 2013. "Scope and Flaws of the New Neoclassical Synthesis," DEM Discussion Papers 2013/13, Department of Economics and Management.
    5. Claudio Borio & Piti Disyatat & Phurichai Rungcharoenkitkul, 2018. "What Anchors for the Natural Rate of Interest?," PIER Discussion Papers 98, Puey Ungphakorn Institute for Economic Research.
    6. Claudio Borio & Piti Disyatat & Mikael Juselius & Phurichai Rungcharoenkitkul, 2018. "La política monetaria cercada por un movimiento de pinzas," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 21(2), pages 004-044, August.

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    More about this item

    Keywords

    Monetary Policy; Bank of Canada; inflation; neutral interest rate; Canadian economy;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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