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Excellent. As long as Canadian rates are not at infinity, the BOC still has room to raise them (and hence offset fiscal expansion). And 1% is a long way from infinity.

Thanks Scott!

Being charitable, we might also think that the Bank of Canada is admitting either a nonlinear policy response or a "latch" policy response.

Suppose, for example, the Bank of Canada foresees inflation returning to its target over four years with a given set of CB actions. That would be consistent with a medium-term inflation target. Now, if the fiscal authority conducts deficit spending such that the CB thinks inflation will now hit its target in two years, that's still consistent with the same set of CB actions (over the first two years, anyway), yet it is also stimulative.

I think this is consistent with global CB actions so far. Between low inflation rates, low inflation targets, and the ZLB (at least in terms of policy), central banks have great difficulty in setting large negative (effective) real interest rates. The best we can hope for is -1% to -2%, which should result in a return to target but may not do so quickly. It's hardly the -10% to +10% range we could see in the early 80s.

Finally, there may also be "concrete steppes" concerns. The two most recent BoC rate cuts, for example, were met with smaller reductions in commercial banks' prime lending rates to consumers, which limits the influence of those rate cuts on general private-sector demand. The BoC could continue the beatings (that is, cut rates further) until morale improves, but that would be unconventional policy.

That interview reads like so many party apparatchik buzzwords strung together to the point of being meaningless. I can't believe anyone takes that stuff seriously.

The issue is about control, in particular who can control the flow of money and how to redistribute to the politically connected interest groups. Governments have more options in this regard... drawing an example from Australia we had the "National Broadband Network" which was a project clearly not commercially viable, but government dumped taxpayer money into it, no bank would ever have offered money for that. The Australian government also put through a bunch of anti-competitive laws in the hope of removing some of the market competitors but regardless of that the project failing anyway and the government is having difficulty fully enforcing such anti-competitive laws in practice.

The problem for government is that these heavy handed "infrastructure" projects are also very obvious, and hard to hold at arm's length, so everyone knows exactly who the winners and losers are. Central banks can be a bit more subtle about the whole thing, which also ties their hands to some extent.

Cantillon effects.

Majro: you might, just, be onto something there. The Bank has always interpreted the "flexible" part of "flexible inflation targeting" to mean "we don't always try to get back to 2% instantly". (For good reason, since doing so might cause some very severe relative price changes and real distortions, given some prices are stickier than others). Originally it defined the "medium term" as "6 to 8 quarters" (meaning 12-month inflation ending 6 to 8 quarters ahead). More recently it has adopted a more "flexible" definition of "flexible", meaning "the length of the horizon depends on how big the missed shock was".

But it is not obvious to me why fiscal vs monetary would affect the optimal horizon. Plus, 12 month core inflation was 1.9% in February and 2.1% in March. (The Bank targets core at a medium horizon and headline at a longer horizon).

Tel: try being interviewed when you are #2 in a large organisation! You have to be very careful what you say. Especially when lots of people could make big money if they could interpret what you are saying better than everyone else.

Whether we like it or not, central banks exist. They have control. The question is: how best to use that control.

Nick, I'm well aware of how Fedspeak operates, that doesn't mean I have to respect such behaviour.

Whether we like it or not, central banks exist. They have control. The question is: how best to use that control.
Fatalism, do you look both ways before crossing the road?

The answer is already well known, the best thing central banks can do is stabilize the currency. They even give lip service to this goal themselves, they just consider "stability" to mean steady inflation plus QE whenever they feel like it. Clearly this is not stability under the normal sense of the word.

The problem is Keynesian stimulus, and central bankers are as guilty as anyone of propagating the myth that this can work. Dual mandate implies no mandate at all.

It's difficult to interpret her answer because she sort of vaguely waves in the direction of several ideas:

"There are concerns about the effects of persistently low interest rates and the quantitative easing that other countries have done, in terms of increasing risk-taking by financial market players and individuals. If fiscal policy can do some of the heavy lifting, that’s a positive thing. Fiscal policy at low interest rates is also just more effective. In a world where growth is going to be structurally slower because of demographic changes, monetary policy can’t fix that. If we want sustainable growth, we need to boost productivity, not only in Canada [but in] the global economy. That’s the only place growth can come from."

The first part (about quantitative easing) seems to be talking about some possible problems of low interest rates for financial stability. This is sensible, as you indicate in your post.

The "fiscal policy at low interest rates is also just more effective" bit is a little ambiguous. But immediately after this she argues that low interest rates indicate higher returns to public investment relative to private investment. So that's one possible interpretation of the sentence -- it's not that fiscal policy is "more effective" because there's a big multiplier, but because public investment carries a high return relative to private investment, and so will boost growth.

jonathan: I missed that bit about relative returns to public vs private investment. In principle, just as lower interest rates are supposed to make private investment more profitable, they should do the same to public investment. (Though that's holding a lot of other things equal, of course.)

> In principle, just as lower interest rates are supposed to make private investment more profitable, they should do the same to public investment.

The statement makes more sense if we interpret it as referring to real interest rates. If market interest rates are low, then that suggests that the return on the marginal private-sector investment is also low due to either overinvestment or poor a supply-side environment.

However, the public cannot contribute to the marginal public-sector investment, since the level of public investment is determined by the government and not markets. If government has been following an a-priori prescribed level of public investment, then it's quite possible that the rate of return on the marginal public investment is greater than the rate of return on the marginal private investment.

This is the opposite of the crowding-out effect, where positive real-return private investments are foregone because the public sector is overpaying for lower-return public spending.

I wonder what would happen if the monetary authority committed to inflation targeting and the fiscal authority committed to a fixed target of debt service (say, 2% GDP). With this pair of instruments, might the Wicksellian rate be controlled?

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