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

  • David Laidler

    (C.D. Howe Institute)

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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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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  1. A. Cohen & G. Harcourt., 2009. "Whatever Happened to the Cambridge Capital Theory Controversies?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
  2. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
  3. 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.
  4. repec:cup:cbooks:9780521645966 is not listed on IDEAS
  5. repec:cup:cbooks:9780521641739 is not listed on IDEAS
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