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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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    Citations

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    Cited by:

    1. Thomas J Carter & Rhys Mendes & Lawrence L Schembri, 2018. "Credibility, Flexibility and Renewal: The Evolution of Inflation Targeting in Canada," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    2. Champagne, Julien & Sekkel, Rodrigo, 2018. "Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 72-87.
    3. Mr. Maurice Obstfeld & Kevin Clinton & Mr. Ondrej Kamenik & Mr. Douglas Laxton & Ms. Yulia Ustyugova & Hou Wang, 2016. "How to Improve Inflation Targeting in Canada," IMF Working Papers 2016/192, International Monetary Fund.
    4. Grahame Johnson & Sharon Kozicki & Romanos Priftis & Lena Suchanek & Jonathan Witmer & Jing Yang, 2020. "Implementation and Effectiveness of Extended Monetary Policy Tools: Lessons from the Literature," Discussion Papers 2020-16, Bank of Canada.
    5. Demiralp, Selva & Eisenschmidt, Jens & Vlassopoulos, Thomas, 2021. "Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area," European Economic Review, Elsevier, vol. 136(C).
    6. Simona Malovana & Josef Bajzik & Dominika Ehrenbergerova & Jan Janku, 2020. "A Prolonged Period of Low Interest Rates: Unintended Consequences," Research and Policy Notes 2020/02, Czech National Bank.
    7. José Dorich & Nicholas Labelle St-Pierre & Vadym Lepetyuk & Rhys R. Mendes, 2018. "Could a higher inflation target enhance macroeconomic stability?," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 1029-1055, August.
    8. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
    9. Christian Grisse, 2023. "Lower Bound Uncertainty and Long‐Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 619-634, March.
    10. Dominika Kolcunova & Tomas Havranek, 2018. "Estimating the Effective Lower Bound on the Czech National Bank’s Policy Rate," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 550-577, December.
    11. Gerhard Rösl & Franz Seitz & Karl-Heinz Tödter, 2019. "The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis," Economies, MDPI, vol. 7(3), pages 1-18, July.
    12. Franta, Michal, 2021. "The Likelihood Of Effective Lower Bound Events," Macroeconomic Dynamics, Cambridge University Press, vol. 25(8), pages 2058-2079, December.
    13. Walter Engert & Ben Fung, 2017. "Central Bank Digital Currency: Motivations and Implications," Discussion Papers 17-16, Bank of Canada.
    14. Edoardo Rainone, 2022. "Currency demand at negative policy rates," Temi di discussione (Economic working papers) 1359, Bank of Italy, Economic Research and International Relations Area.
    15. Rösl, Gerhard & Seitz, Franz & Tödter, Karl-Heinz, 2017. "Doing away with cash? The welfare costs of abolishing cash," IMFS Working Paper Series 112, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    16. Peter Tillmann, 2019. "Robust Monetary Policy Under Uncertainty About the Lower Bound," MAGKS Papers on Economics 201914, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    17. Christopher S. Sutherland, 2017. "What Explains Month-End Funding Pressure in Canada?," Discussion Papers 17-9, Bank of Canada.
    18. Pierre Fortin, 2016. "A Stable 4% Inflation Could Get Canadians One Half Million More Jobs," Cahiers de recherche 1604, CIRPEE.
    19. Jean-Sébastien Fontaine & James Hately & Adrian Walton, 2017. "Repo Market Functioning when the Interest Rate Is Low or Negative," Discussion Papers 17-3, Bank of Canada.
    20. Joshua R Hendrickson, 2019. "There is no such thing as the zero lower bound," Economics Bulletin, AccessEcon, vol. 39(3), pages 1870-1875.
    21. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    22. Beniak, Patrycja, 2019. "Central bank digital currency and monetary policy: a literature review," MPRA Paper 96663, University Library of Munich, Germany.
    23. Gerhard Rösl & Franz Seitz & Karl-Heinz Tödter, 2017. "Besser ohne Bargeld? Gesamtwirtschaftliche Wohlfahrtsverluste der Bargeldabschaffung," ROME Working Papers 201706, ROME Network.
    24. Yang Zhang & Lena Suchanek & Jonathan Swarbrick & Joel Wagner & Tudor Schlanger, 2021. "Sequencing Extended Monetary Policies at the Effective Lower Bound," Discussion Papers 2021-10, Bank of Canada.
    25. Assenmacher, Katrin & Seitz, Franz & Tenhofen, Jörn, 2017. "The use of large denomination banknotes in Switzerland," International Cash Conference 2017 – War on Cash: Is there a Future for Cash? 162917, Deutsche Bundesbank.

    More about this item

    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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