Staff research

We explore the drivers of the surge in inflation in Canada during the COVID-19 pandemic. This work is part of a joint effort by 11 central banks using the model developed by Bernanke and Blanchard (2023) to identify similarities and differences across economies.

A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.