IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

The Dangers of an Extended Period of Low Interest Rates: Why the Bank of Canada Should Start Raising Them Now

Listed author(s):
  • Paul R. Masson

    (University of Toronto)

Interest rates in Canada and in many other countries have not been so low since the Great Depression. When taking into account inflation, short-term interest rates are negative in most developed countries, including Canada where the overnight rate currently stands at 1 percent in nominal terms. These historically low rates were initially a response to the global financial crisis that broke out in 2008. The financial crisis led to a sharp fall in economic activity, a dislocation of the financial system, and the need in many countries to recapitalize banks with public money. Output growth has resumed in the United States, but unemployment remains unsatisfactorily high. In the European Union, the recovery has been hampered by high public debt and fears of a breakdown of the euro area. Canada however does not face the same problems as either the United States or the EU. Its financial system was exposed to a much lesser extent to complicated sub-prime, mortgage-backed securities, and its economic difficulties are nowhere near as pronounced. The current downturn of output compared with its potential, although significant, has been less severe in Canada, and gross domestic product (GDP) has returned to a value closer to the economy’s capacity. In this Commentary, I argue that short-term rates are therefore too low in Canada, a situation that is starting to build in pervasive problems for the economy. Below-equilibrium interest rates for an extended period distort investment decisions, leading to excessive risk taking and inefficient and ultimately unprofitable investments. They also encourage the formation of asset bubbles whose collapse could lead to a recurrence of the recent financial crisis. Some of the symptoms of inefficient investment and asset price bubbles are already evident in Canada, in the housing sector for instance. The cumulative effect of artificially low interest rates also risks fuelling an underlying inflationary process. Therefore, I recommend that the Bank of Canada start now to reverse some of the monetary stimulus and begin raising interest rates.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

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

Volume (Year): (2013)
Issue (Month): 381 (May)

in new window

Handle: RePEc:cdh:commen:381
Contact details of provider: Postal:
67 Yonge St., Suite 300, Toronto, Ontario M5E 1J8

Phone: (416) 865-1904
Fax: (416) 865-1866
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
  2. Hahm, Joon-Ho & Mishkin, Frederic S. & Shin, Hyun Song & Shin, Kwanho, 2011. "Macroprudential policies in open emerging economies," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 63-114.
  3. Bo Becker & Victoria Ivashina, 2015. "Reaching for Yield in the Bond Market," Journal of Finance, American Finance Association, vol. 70(5), pages 1863-1902, October.
  4. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cdh:commen:381. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kristine Gray)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.