I want to compare the economies of Canada, Australia, and New Zealand over the last couple of years. I know I will get things wrong, and leave important things out. That's what comments are for. Especially comments from Australia and New Zealand.
Why these three countries? Apart from any historical, cultural, and political similarities, all three are small open economies with an inflation targeting central bank. But there's one big difference between Canada and the other two.
The Bank of Canada hit the notorious "Zero Lower Bound" on nominal interest rates (or felt it had). That's supposed to matter. A central bank that hits that constraint cannot loosen monetary policy enough to offset a decline in aggregate demand. The Reserve Banks of Australia and New Zealand didn't even come close to the lower bound. So seeing how the otherwise similar Australia and New Zealand did compared to Canada should tell us if the ZLB matters. Australia seems to have done better than Canada, which fits the theory. But New Zealand seems to have done worse.
Inflation targets. Canada and New Zealand target 2% CPI inflation. Australia targets 2.5% CPI inflation.
Interest Rates. All three countries' central banks use the same interest rate mechanism to implement inflation targeting. But there is a very big difference between the actual numbers.
Compared to Canada, New Zealand has always had very high interest rates during the years of inflation targeting. In the first half of 2008, the overnight rate target was 8.25%. The RBNZ began cutting in July 2008, to a low of 2.50% in April 2009, where it has stayed since. This is one important difference, because the RBNZ could cut a massive 5.75% and yet never got anywhere even close to any Zero Lower Bound or liquidity trap.
Australia has also had much higher interest rates than Canada during the years of inflation targeting. In Summer 2008 the overnight rate target was 7.25%. The RBA began cutting in September 2008, to a low of 3.00% by April 2009, then began raising again in October 2009. Again, despite cutting 4.25%, the RBA never got anywhere even close to any Zero Lower Bound or liquidity trap.
Canada had an overnight rate target of 3% in Summer 2008. The BoC began cutting in October 2008, to a low of 0.25% in April 2009, where it has stayed since. A mere 2.75% cut brought the BoC to what it considered to be the lower bound.
New Zealanders and Australians have long puzzled over why their interest rates are so much higher than other countries' like Canada. I have read a little bit about this, but don't remember any really satisfactory explanation. But whatever the reason, their higher interest rates going in gave their central banks much more room to cut when aggregate demand fell.
But we have to be careful here. In absolute terms, RBNZ cut the most, at 5.75 percentage points, followed by RBA, at 4,25 percentage points, followed by BoC, at 2.75 percentage points. Yet in relative terms, BoC cut the most at 92%, followed by RBNZ at 70%, followed by RBA at 59%. It's not obvious what's the best way to compare the three countries.
Inflation. All three countries had CPI inflation above target in Summer 2008. Australia and New Zealand peaked around 5% inflation, while Canada peaked around 3.5% inflation. All three saw big declines in inflation, but Canada saw inflation dip the most below target, into temporarily negative values for Summer 2009. All three now have inflation close to target.
Unemployment. All three countries saw unemployment rates increase. Australia saw the smallest absolute increase, from 4.2% in Summer 2008 to a high of 5.8% in Summer 2009. Canada saw a larger increase over the same period, from around 6.0% to a high around 8.5%. New Zealand fared worst, with the unemployment rate doubling, albeit from abnormally low levels, and with no decline yet.
GDP. (Update, I forgot this one!). Australia only had one quarter of declining real GDP (and so escaped that stupid "technical recession" definition). New Zealand's GDP did much worse than Australia's, and about as bad as the US. Canada did better than the US.
Banks and Finance. None of the three countries saw any major financial institution in major trouble? Right, readers?
House prices. Canada saw house prices fall by around 8%, then recover fully. New Zealand saw a slightly larger decline, and house prices have stopped falling but have yet to recover. Australian house prices barely fell at all, and then continued to rise (pdf).
Conclusion. I don't have one really. After all, it's only a sample of three. But if the zero lower bound were such a problem I would have expected both Australia and New Zealand to have done much better than Canada. Only Australia did. And before you say that there were other shocks to aggregate demand, and that they were different for the three countries, remember this: a central bank that is not at the zero lower bound is supposed to offset any such shocks to keep inflation on target.