Op-Eds

The Bank of Canada normally responds to the threat of a large recession by aggressively cutting interest rates. It won’t be able to use this strategy the next time around: short-term interest rates would hit zero before the job is done. Instead, the Bank will have to rely on large-scale purchases of long-term financial assets (quantitative easing) and a big depreciation of the Canadian exchange rate. While helpful, these policies are unlikely to be as effective as the Bank’s traditional strategy for fighting recessions. The Bank’s benchmark-interest rate is now only 1.75 per cent, well below its level of 4.5 per cent on the eve of the 2007 financial crisis. Long-term interest rates are even lower. There is no reason to expect that these...
The Bank of Canada held its overnight rate constant at 1.75 per cent this week. Markets had completely priced this in, but nevertheless, there are reasons to be surprised by this decision, and perhaps even consider it a missed opportunity. Let’s start with the state of the Canadian economy. Economic growth is rebounding in the second quarter after a sluggish first quarter. Some of this is because of temporary factors such as increased oil production. However, other factors, including the labour market, appear quite strong. Average hourly earnings have grown in five consecutive months, peaking at a growth rate of 3.8 per cent in June. May unemployment fell to 5.4 per cent, the lowest rate since Canada began tracking unemployment...
Modern Monetary Theory (MMT), once a relatively obscure branch of macroeconomics, has recently gained star status. It is riding high in the popular press in the U.S. and has been endorsed by many in the left wing of the Democratic party as a way of financing massive spending programs such as the “Green New Deal” and “Medicare for All.” MMT holds that a country with its own currency doesn’t have to worry about accumulating government debt: it can always print money to service the interest on its debt and pay down the principal. If this seems like magical thinking, it’s probably because it is. MMT’s basis is that fiscal policy is the key to achieving full employment, using the printing of money to finance government spending. (“Printing...
Senator Diane Bellemare has launched an inquiry into revising the Bank of Canada Act to add full employment to the bank’s mandate. Senator Bellemare’s inquiry appears to reflect a view that the bank’s current framework – expressed in periodic agreements with the Parliament of Canada – of pursuing 2-per-cent inflation is deficient, and that requiring the bank to pursue an explicit goal related to jobs would improve it. An alternative take on the situation is that the current framework is a sensible and highly successful way for the bank to pursue its existing mandate – which is in the Bank of Canada Act and already refers, among other goals, to mitigating fluctuations in employment and promoting the economic and financial...
As expected, the Bank of Canada held its overnight rate target constant at 1.75 per cent this week. More unexpectedly, with the release of its latest Monetary Policy Report, the central bank lowered its estimate of the neutral nominal rate – the rate compatible with full-capacity output and inflation equal to the 2-per-cent target – to 2.25 per cent to 3.25 per cent, from 2.5 per cent to 3.5 per cent. This means that the constant overnight target rate is closer to the neutral rate than previously thought, providing less stimulus to the economy. As the lower end of the range gets closer to 2 per cent, meaning the real neutral rate would be zero, it is fair to ask how much lower the neutral rate can go. From a data perspective,...