Lessons from the Yield Curve: Evaluating Monetary Policy in Different Interest Rate Environments

Bank of Canada Policy Must Adapt to Changing Interest Rate Environments 

• The Bank of Canada needs to take into account prevailing interest rate environments and adjust its monetary policy tools accordingly, finds a new report from the C.D. Howe Institute.
• In “Lessons from the Yield Curve: Evaluating Monetary Policy in Different Interest Rate Environments,” authors Thorsten Koeppl and Jeremy Kronick explain that it is vital that central banks have a clear understanding on how the impact of monetary policy on the economy, the so-called transmission mechanism, changes based on the underlying interest rate environment.
• “Our results suggest that the interest rate environment, whether rates are low or more normal, matters for the effectiveness of monetary policy,” notes Koeppl. “Right now, the Bank is stamping out inflation fires, but it should look forward to a new normal in the medium-term, which has implications for what works best in achieving its 2 percent target.”