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Harnessing the benefit of state-contingent forward guidance

Author

Listed:
  • Vivian Chu
  • Yang Zhang

Abstract

A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.

Suggested Citation

  • Vivian Chu & Yang Zhang, 2022. "Harnessing the benefit of state-contingent forward guidance," Staff Analytical Notes 2022-13, Bank of Canada.
    • Handle: RePEc:bca:bocsan:22-13
    as

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    References listed on IDEAS

    as
    1. Guyllaume Faucher & Christopher Hajzler & Martin Kuncl & Dmitry Matveev & Youngmin Park & Temel Taskin, 2022. "Potential output and the neutral rate in Canada: 2022 reassessment," Staff Analytical Notes 2022-3, Bank of Canada.
    2. Lukasz Rachel & Thomas D. Smith, 2017. "Are Low Real Interest Rates Here to Stay?," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 1-42, September.
    3. 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.
    4. Paul Corrigan & Hélène Desgagnés & José Dorich & Vadym Lepetyuk & Wataru Miyamoto & Yang Zhang, 2021. "ToTEM III: The Bank of Canada’s Main DSGE Model for Projection and Policy Analysis," Technical Reports 119, Bank of Canada.
    5. Rhys R. Mendes, 2014. "The Neutral Rate of Interest in Canada," Discussion Papers 14-5, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Central bank research; Economic models; Monetary policy framework; Monetary policy transmission;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • 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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