Natural Hazards: Some Pitfalls on the Path to a Neutral Interest Rate

While the Bank of Canada expects the Canadian economy to return to full employment by the middle of 2012, its critics have stressed the need to raise interest rates to a “neutral” value by then to keep inflation stable. But defining this neutral level, normally associated with full employment, is a bit of a smoke and mirrors game, according to a report from the C.D. Howe Institute. In “Natural Hazards: Some Pitfalls on the Path to a Neutral Interest Rate,” David Laidler, a leading monetary economist, questions the theoretical concept of the "natural interest rate" that underlies the idea that there is a well-determined and stable neutral value for market rates.