Two weeks ago I wrote a post "Monetary stimulus vs financial stability is a false trade-off".
My opening lines in that post were: "There's an idea floating around out there that I fear may be influential. And that idea is horribly wrong. Which makes it dangerous. And I want to try to kill it."
Today, the C.D. Howe Institute publishes a Commentary by Paul Masson "The dangers of an extended period of low interest rates: why the Bank of Canada should start raising them now".
That's the idea I was talking about.
If you are worried about the dangers of an extended period of low interest rates, the worst possible thing the Bank of Canada could do would be to start raising them now. Because if the Bank of Canada tightens monetary policy now, and this causes the economy to slip back into recession and disinflation, that would require an extended period of even lower interest rates in the future.
Now go read my old post. Update: and posts by Mike Konczal and Brad DeLong. Update2: and see how the Bank of Japan's looser monetary policy is raising interest rates on 10 year bonds (finally, now the bond market has woken up to the fact that monetary policy really has loosened).
Update 3: To see pictures of recent Canadian data, which illustrate my point here, see Marcus Nunes' post.
Update4: if you want a mechanical metaphor to help you understand the paradox here: the Bank of Canada is like a man balancing a pole upright in the palm of his hand. If he wants the pole to move north, he must first move his hand south, so the pole begins to lean north, so he can then move his hand north to prevent the pole falling over. Except the pole has expectations.