Some Pitfalls on the Path to a Neutral Interest Rate

16 Pages Posted: 19 Aug 2011

See all articles by David E. W. Laidler

David E. W. Laidler

University of Western Ontario - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 28, 2011

Abstract

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.

Keywords: Monetary Policy, Bank of Canada, inflation, neutral interest rate, Canadian economy

JEL Classification: E5, E58

Suggested Citation

Laidler, David E. W., Some Pitfalls on the Path to a Neutral Interest Rate (July 28, 2011). C.D. Howe Institute Backgrounder, Vol. 140, 2011, Available at SSRN: https://ssrn.com/abstract=1912030

David E. W. Laidler (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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