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Recently, the Bank of Canada has estimated the effective lower bound (ELB) on its policy interest rate to be about -50 basis points. This article outlines the analysis that underpins that estimate by quantifying the costs of storing and using cash in Canada. It also explores how some international markets have adapted to negative interest rates, issues surrounding their implementation, as well as their transmission to other interest rates in the economy. Finally, it discusses theoretical ideas on how the ELB could be reduced further.

The article examines the extent of downward nominal wage rigidity in Canada and its implications for monetary policy. The authors ask whether its existence is a sufficient argument for a higher inflation target if concerns about the effective lower bound are adequately addressed.

Central banks can implement unconventional monetary policy measures to provide additional easing when policy interest rates come close to their lower limit. To date, the international experience with tools such as quantitative easing and negative interest rates has been largely positive. Central banks may also use several such measures simultaneously, with often mutually reinforcing effects. Yet, unconventional tools are also subject to potential limits, and the costs associated with these measures could rise with extensive and prolonged use.

Inflation-targeting frameworks have remained relatively stable over the past few years despite significant challenges, including prolonged low inflation, a large negative commodity price shock and rising financial stability concerns in some economies. The tools used by central banks have, however, evolved substantially. This article provides a survey of the developments in the inflation-targeting frameworks of 10 central banks in advanced economies that correspond to the three research areas of the Bank of Canada’s 2016 renewal: the level of the inflation target, the measurement of core inflation and financial stability considerations in the formulation of monetary policy.

This issue focuses on the upcoming renewal of Canada’s inflation-control target. Bank researchers discuss the estimate of the lower bound to policy interest rates in Canada. They also discuss downward nominal wage rigidity and whether its presence warrants considering a higher inflation target. The third article highlights the experience some international central banks have had with unconventional monetary policies. The final article describes monetary policy frameworks in 10 advanced economies.