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Estimating Canada’s Effective Lower Bound

Author

Listed:
  • Jonathan Witmer
  • Jing Yang

Abstract

In 2009, the Bank of Canada set its effective lower bound (ELB) at 25 basis points (bps). Given the recent experience of Sweden, Denmark, Switzerland and the euro area with negative interest rates, we examine the economics of negative interest rates and suggest that cash storage costs are the source of a negative lower bound on interest rates. European experience demonstrates that markets can adapt to challenges associated with negative interest rates. However, given uncertainty over the precise level of the lower bound, central banks should monitor both market functioning and the demand for cash in order to identify signals that policy rates are approaching their lower bound.

Suggested Citation

  • Jonathan Witmer & Jing Yang, 2015. "Estimating Canada’s Effective Lower Bound," Staff Analytical Notes 15-2, Bank of Canada.
    • Handle: RePEc:bca:bocsan:15-2
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    Keywords

    Central bank research; Monetary policy framework; Monetary policy implementation;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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