The Neutral Rate in Canada: 2019 Update

Thomas Carter, Xin Chen and José Dorich

No 2019-11, Staff Analytical Notes from Bank of Canada

Abstract: This note provides an update on Bank of Canada staff’s assessment of the Canadian neutral rate. The neutral rate is the policy rate needed to keep output at its potential level and inflation at target once the effects of any cyclical shocks have dissipated. This medium- to long-run concept serves as a benchmark for gauging the degree of monetary stimulus provided by a given policy setting. Staff’s overall assessment, which is based on the combined output of a suite of four distinct approaches, is that the Canadian neutral rate likely lies in a range of 2.25 to 3.25 per cent in nominal terms, lower than the range of 2.5 to 3.5 per cent reported at the time of the last update in April 2018. Although this downward shift stems mainly from a lower assessed global neutral rate, the overall assessment also reflects some improved modelling techniques enabling staff to better capture the medium- to long-run impact of macroeconomic risk on the level of the neutral rate. Moreover, while staff’s assessed range for the neutral rate captures important sources of uncertainty, it should not be interpreted as reflecting the full extent of the uncertainties surrounding the neutral rate.

Keywords: Labour markets; Potential output; Productivity (search for similar items in EconPapers)
JEL-codes: E40 E43 E50 E52 E58 F41 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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