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One of the most important factors that must be considered if countries are thinking about lowering the target level of inflation much below 2 per cent is the zero interest bound. Targeting inflation rates that are too low, the authors note, may restrict the ability of monetary policy to respond to economic shocks by limiting the amount by which interest rates can be eased.

This paper estimates a dynamic factor model (DFM) for nowcasting Canadian gross domestic product. The model is estimated with a mix of soft and hard indicators, and it features a high share of international data.

We use retail payment data in conjunction with machine learning techniques to predict the effects of COVID-19 on the Canadian economy in near-real time. Our model yields a significant increase in macroeconomic prediction accuracy over a linear benchmark model.

Governor Tiff Macklem discusses the Bank’s latest interest rate announcement and explains the uneven impact that the COVID-19 pandemic is having on different sectors and people.

The paper reviews evidence from the economic literature on the nature of the relationship between excess capacity and inflation, better known as the Phillips curve. In particular, we examine the linearity of this relationship. This is an important issue in the current economic context in which advanced economies are approaching or exceed their potential output.

I am honoured to address members of the Canadian Association for Business Economics. My remarks today will focus on critical issues that the Bank of Canada has studied over the past four years and how this research will inform our work as we move forward post crisis.

Central banks face considerable uncertainty when conducting monetary policy. The COVID-19 pandemic brought this issue back to the forefront of policy discussions. We draw from academic literature to review key sources of uncertainty and how they affect the conduct of monetary policy.

For several decades, the prices of services have been rising more rapidly than the prices of goods in Canada and the other major industrialized countries. In 2002, this gap between the growth rates of these two components of the consumer price index (CPI) widened considerably, leading researchers to ask if this was the beginning of a trend. Analysis reveals, however, that the gap is based on short-term dynamics and that it appears to be independent of the trend in the development of the overall price level. Evidence also shows that the gap is eventually reabsorbed. The authors examine a number of potential causes for the prices of services to rise faster than those of goods. These include the more rapid pace of productivity growth in the goods sector, the greater openness of goods to foreign trade, and stronger growth in the demand for services.

In this paper, we argue that differences in the cost structures across sectors play an important role in firms’ decisions to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers.