Harnessing the benefit of state-contingent forward guidance

Vivian Chu and Yang Zhang

No 2022-13, Staff Analytical Notes from Bank of Canada

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.

Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E E27 E37 E4 E58 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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