Research and Publications

Sequencing Extended Monetary Policies at the Effective Lower Bound with Yang Zhang, Lena Suchanek, Jonathan Swarbrick, Joel Wagner | Bank of Canada Staff Discussion Paper

Abstract

In response to the global COVID-19 pandemic, the Bank of Canada aggressively lowered its policy interest rate and provided additional easing using forward guidance and quantitative easing. In this analysis, we use simulations in the Bank of Canada’s projection model-the Terms-of-Trade Economic Model-to consider a suite of extended monetary policies (EMPs) to support the economy following the COVID-19 crisis. We focus on the implementation sequencing of three EMP options when the policy rate is at the effective lower bound: credit easing, forward guidance and quantitative easing.

A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality with Joel Wagner and Yang Zhang | Bank of Canada Staff Discussion Paper

Abstract

We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative monetary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes’ performance with and without an effective lower bound constraint. Our results suggest that the performance of history-dependent frameworks is sensitive to departures from rational expectations. The benefits of adopting history-dependent frameworks over flexible inflation targeting gradually diminish with a greater degree of bounded rationality. This finding is in line with laboratory experiments that show flexible inflation targeting remains a robust framework to stabilize macroeconomic fluctuations.