Remarks by Lawrence Schembri
Deputy Governor of the Bank of Canada
Ottawa Economics Association and CFA Society Ottawa
Ottawa, Ontario
May 16, 2018
The (Mostly) Long and Short of
Potential Output
Introduction
Thank you for inviting me here today.
An important, if sometimes underappreciated, purpose of central bank speeches is to
help the public understand what we are trying to achieve, and why. A greater
understanding of our monetary policy actions helps make them more effective. And as a
public institution, we have an obligation to highlight and demystify the concepts that
guide our thinking in a way that all interested citizens, not just the experts in this room,
can grasp.
Few in the public likely give much thought to potential output, for example. Yet this
somewhat abstract notion is vital to how most central banks evaluate inflationary
pressures and conduct monetary policy. At the Bank of Canada, being able to estimate
and project potential output has contributed notably to our strong track record of
meeting our inflation objectives.
At the same time, the dynamics of potential output are primarily shaped by slow-moving
forces that can take time to have a material impact, such as demographic shifts, capital
accumulation and technological change. Equally important, many of these same forces
influence a country's standard of living.
A significant development in recent decades is that growth in potential output has been
on a generally downward trend in most major advanced economies, including Canada,
largely owing to the aging of our populations. This trend has important implications for
our macroeconomic policy frameworks and for our economic prospects.
My remarks today are organized around four separate but closely related questions:
1. What is potential output?
2. How do we measure it?
3.
Why is it important for policy?
4. What policies have supported potential output growth in the past and could again
in the future?
The answers to these questions should help you better understand not only our policy in
the near term, but also our thinking about policy-making over a longer horizon.
What is potential output?
"potential" in the context of individual
Turning to the first question, we usually refer to
as in one's
achievement, "realizing potential." When I was much younger, for example,
my aspirations for my own potential included growing as tall as my favourite player on
the Dallas Cowboys, becoming a pitcher for the Toronto Blue Jays, and obtaining a
PhD. My immigrant parents placed more value on education than sports, so they were
quite relieved that I only managed two out of three.
apply "potential" in a similar
Central banks way-to assess what an entire economy,
"potential"
rather than a single person, can achieve on a sustainable basis. So can be
viewed as a measure of aggregate, or total, supply in an economy. Essentially, it refers
an economy's
to capacity to produce goods and services when all available productive
resources-specifically, labour and capital-are used to their fullest.
In practice, we pay close attention to the growth rate of potential output as well as to its
An economy's productive capacity
level. is normally always growing as available
resources and their productivity expand. But the speed at which potential output grows
has important short- and long-run implications. In the short run, the rate of potential
output growth indicates how quickly an economy can grow on an ongoing basis without
stoking inflationary pressures. In the long run, potential output growth is a useful gauge
of an economy's prospects,
namely the outlook for national income and standard of
living, because these are largely determined by the forces of supply.
Digging a little deeper, most central banks including the Bank of Canada-, interpret an
economy's
actual output growth, its gross domestic product (GDP), as being determined
economy's
in the short run by the forces moving aggregate demand. An potential output
growth, meanwhile, reflects the evolution of aggregate supply over a longer horizon
(Chart 1).i Aggregate demand growth tends to move with short-term factors-such as
shocks to foreign demand and exports-which may trigger cyclical movements in, for
example, inventories and consumer purchases of durable goods. Aggregate supply
growth is affected more by the slow-moving forces that I noted earlier.
Chart 1:
Potential output growth is less variable than actual output growth
Annual data
%
6
4
2
0
-2
-4
Range of potential output growth Output gap Potential output growth Real GDP growth
Sources: Statistics Canada and Bank of Canada calculations, estimates and projections
Last data plotted: 2021
So, a central challenge in pinning down potential output growth is disentangling the
short-term fluctuations in GDP caused by demand shocks from long-term fluctuations
that are due to the underlying forces that affect aggregate supply.ii Since the forces that
determine aggregate supply tend to change slowly, we focus on trends when thinking
about and measuring potential.
Now, it's rarely as simple as just separating
short-term phenomena from long-term. The
Great Recession was a once-in-a-lifetime shock to aggregate demand that, because of
its severity, also affected aggregate supply. Consequently, a decade later, this
experience continues to have an impact on potential output in advanced economies.
So, the disentanglement challenge is two-fold: first, identifying the trend movements, as
opposed to temporary or cyclical ones; then, identifying the forces driving the trend
movements, which also helps us predict how long they'll persist.
I'll go into more detail shortly about how we
measure potential output growth.
But one way to look at it is to break it into two components:

the long-run growth rate of total hours worked in the economy-known as trend
labour input (TLI); and

the long-run growth rate of how much output is produced per hour of work-
known as trend labour productivity (TLP).
shows each component's respective
To illustrate the TLI-TLP decomposition, Chart 2
contributions to Canadian potential output growth since 1992.iii The chart reflects the
findings of the Bank's annual
reassessment of potential output growth, which we
recently published as an appendix to our April Monetary Policy Report (MPR).
Chart 2: Potential output growth has been on a downward trend since 2000, but is expected to
remain flat in the near future
Annual data
%
4
3
2
1
0
Trend labour input Trend labour productivity Potential output growth
Source: Bank of Canada estimates and projections Last data plotted: 2021
Two observations are important. First, the chart shows a secular, or persistent, decline
in TLI and, thus, in potential output growth. Population aging is the biggest reason, and
Second, TLP's contribution to potential output
it is only partly offset by immigration.iv
growth has also declined somewhat from the period before the global financial crisis.
TLP growth is expected to increase modestly in the coming years. This is mainly
because the slowdown in investment and productivity growth that followed the sharp
decline in commodity prices in 2014-15 turned out to be less pronounced than we
initially expected, and the economy's adjustment from it is now mostly behind us. That is
good news because TLP growth is expected to play a larger role in potential output
growth over the projection and beyond. There is, however, considerable debate about
how much we can expect productivity growth to rise in the future, even as the emerging
digital economy promises to transform how firms operate and how they use their
workforces.v
Canada's experience is similar to that of other advanced economies. Chart 3 shows
that potential output growth in Japan, the United States and key countries in the euro
area is also much lower now than it was in the 1980s, largely due to the same forces
slowdown in Canada. For Canada specifically, the Bank's reassessment
causing the
found that annual potential output growth from 2009 to 2021 would average 1.8 per
cent, much lower than the 2.7 per cent average from 1982 to 2008.
Chart 3: Potential output growth has slowed in most advanced economies since the 1980s
Annual data
%
4
3
2
1
0
Canada France Germany Italy Japan United United States
Kingdom
1980s 1990s 2000s 2010s
Note: The 2010s period includes estimates up to 2021.
Sources: International Monetary Fund and Bank of Canada estimates and projections
With all of this in mind, let's tackle the hard question of how to measure potential output.
How do we measure potential output?
The main challenge in measuring potential output is that it is hypothetical, so it is not
directly observable. We can only estimate it. Over the years, though, the Bank has put a
lot of research effort into refining our methods for assessing this very important variable.
Techniques for estimating potential output growth can be viewed as being along a
spectrum (Chart 4). At one end are simple statistical models that aim to capture
underlying trends in output growth by mechanically filtering out short-term fluctuations.
The problem with these techniques is they are essentially a "black
box"-the data going
out are known, but there's little economic explanation of
in and the estimates coming
how they are connected. At the other end of the spectrum are structural models that rely
primarily on relationships between variables, based on economic theory, to identify and
quantify the impacts of different sources of potential output growth. For example, higher
levels of investment will cause the capital stock to rise faster, leading to more rapid TLP
and potential output growth. However, structural models may produce inaccurate
estimates if the economic theory on which they are based is incorrect or incomplete.
To help manage the uncertainty around measuring potential output growth, the Bank
uses a variety of models along this spectrum that combine statistical filters and
theorybased structural approaches.
This is done so that we can cross-check the estimates from each model and then
combine them to get a reasonably robust assessment.vi Chart 5, for example, displays
estimates for potential output growth from four separate models along the spectrum that
are part of the Bank's staff tool box.vii
Chart 5: Estimates of potential output growth from four different models
Year-over-year percentage change
%
4
3
2
1
Integrated framework Extended multivariate filter
Multivariate state-space framework Basic multivariate filter
Source: Bank of Canada estimates Last observation: 2018Q1
Models that incorporate an economic structure are especially useful for projecting TLP
growth, since TLP is based on variables and relationships that are difficult to measure
and predict. TLI growth is comparatively easier to forecast because it is based on
accurately observed labour market outcomes: the employment rate, the working-age
population and average hours worked.
In contrast, TLP growth depends on two variables that are less concrete and therefore
more challenging to observe precisely. The first of these, capital deepening, is a
measure of growth in the ratio of capital per hour worked.viii The second is a more
elusive concept called trend total factor productivity, or TFP. While we have some
observable measures of investment and capital stock growth, we do not have the same
essentially includes everything affecting firms' productivity that
for trend TFP-which
isn't captured by capital stock growth. These "residual" factors include, for example,
technological improvements and the impact of education and training.ix
Another way that the Bank manages the uncertainty around potential output growth is
by conducting an in-depth review of our projections on an annual basis. First, economic
data are regularly revised, so for that reason alone an annual review makes sense.
Also, our empirical techniques are "living" in a
sense-we are continually improving
them as we learn from experience and ongoing research.x
Plus, in the annual reassessment, we further account for uncertainty by publishing
ranges around our estimates and projections that expand with time. We also list the
factors that could lead potential growth to be lower or higher within those ranges.xi
I would like to stress that the Bank recognizes the difficulties associated with measuring
potential and the related uncertainty, and so takes a deliberate and rigorous approach
to managing this uncertainty. We work hard to ensure that our models evolve in line with
prevailing best practices. And on top of using multiple techniques, we corroborate the
models' results against other measures of capacity and inflation, and then apply
wellinformed judgment. Finally, the uncertainty around these estimates is taken into account
in the formulation of monetary policy. This helps us ensure that our estimates and our
policy decisions are consistent with our broader economic outlook.
Now, let me expand on why potential output is important for policy.
Why is potential output important for policy?
The conduct of monetary policy
For the conduct of monetary policy, the difference between the level of actual and
"output
potential output-the gap"-is a critical element.xii It indicates how much slack
there is in the economy, and so it is an important determinant and useful gauge of
underlying inflationary pressures. As an inflation-targeting central bank, the Bank of
Canada's assessments of both the current output gap and its projected evolution have
direct bearing on our inflation outlook and policy decisions. Because monetary policy
operates with a well-known lag, the Bank must be forward-looking as we set the policy
interest rate to affect aggregate demand, close any output gap and return inflation to
target on a sustainable basis.
A higher level of potential output for a given level of GDP will mean a more "negative"
output gap-implying (other things being equal) inflation below the 2 per cent target,
greater economic slack and a possible need to ease the policy rate-and vice versa.
Along with the output gap, expectations of inflation are also important in explaining
current inflation. As inflation targets have become more credible, expectations have
become better anchored at the target rate and, in turn, have had a larger influence on
inflation itself.xiii
To illustrate the relationship between the output gap and inflation, consider Chart 6. It
shows that the Bank's three measures of core inflation all increased steadily over the
past year following, with a short lag, the narrowing of our measure of the output gap.
This demonstrates how we use other data to corroborate our estimates of the output
gap, which helps ensure a coherent economic outlook.
Chart 6: Measures of core inflation have risen in line with the rapid absorption of past
excess capacity
Year-over-year percentage change, quarterly data
%
2.5 0.0
-0.5
2.0 -1.0
-1.5
1.5 -2.0
-2.5
1.0 -3.0
2014 2015 2016 2017 2018
Integrated framework output gap (right scale) CPI-trim (left scale)
CPI-median (left scale) CPI-common (left scale)
Sources: Statistics Canada and Bank of Canada estimates Last data plotted: 2018Q1
The higher the projected growth rate of potential output, the faster the economy can
grow without inflation rising persistently above our target. For example, our 2018
reassessment revised the profile for potential higher than it was in the 2017
reassessment, both in terms of its level and growth rate. That means that, in the near
term, we have a bit more room than we thought to support demand without sparking
undue inflationary pressures.
Challenges to the monetary policy framework
Although the inflation-targeting framework has been very successful in the past, looking
ahead, the decline in potential output growth in many advanced economies represents a
notable challenge and has prompted central banks in those countries to revisit their
monetary policy frameworks.xiv
Let me explain. Lower potential output growth in advanced economies is one of the
factors likely contributing to a decline in global real interest rates. For monetary policy,
this implies that the policy rate that is considered neutral-where it will neither stimulate
nor cool the economy because GDP is growing at its potential level, inflation is at target,
and the effects of any shocks have faded-is lower than it would be otherwise.xv The
lower neutral rate has important implications for monetary policy. To effectively buffer
it's desirable that a central bank has
the economy in response to a harmful shock,
sufficient room to lower the policy interest rate without going to zero or below, thus
being forced to use unconventional tools such as large-scale asset purchases (i.e.,
quantitative or credit easing) or negative interest rates.xvi
Our next inflation-target renewal with the Government of Canada, which represents an
opportunity to review our monetary policy framework, is slated for 2021.xvii As part of
that process, we will examine ways to meet this challenge and strengthen the
framework to enhance the resilience of the Canadian economy.
Lower potential output growth also has implications for fiscal policy because it implies
could limit governments' abilities to
less tax revenue than otherwise. Less revenue
implement countercyclical fiscal policy when needed, particularly as demands for public
expenditures rise with an aging population. This aspect is important for monetary policy,
too. The credibility and success of our inflation-targeting regime depends critically on
the coherence of the overall macroeconomic policy framework.xviii
What policies have supported potential output growth in the past
and could again in the future?
To maintain solid potential output growth and rising living standards in the future, what
policy lessons can be drawn from the past?
Historically, Canada has benefited from strong growth and rising living standards. Great
economic opportunity has stimulated employment and investment in capital, while also
encouraging investment in individuals through accessible, quality education and an
inclusive social safety net. We also have benefited from robust political, legal and
economic institutions, and from openness to trade, investment and immigration.
Despite those advantages, developing the appropriate policies to maintain solid
potential output growth in the face of an aging population is a formidable challenge.
Moreover, even the most effective policies can take some time to have a meaningful
said, I'd like to touch on three
impact. That policy areas that have been successful at
promoting potential output growth in the past:

education-I have benefited from the opportunity created by my own access,
and my parents' commitment, to
good-quality education at all levels;

immigration-which is something I know a bit about since my parents arrived in
Canada from Europe during the 1950s; and

trade liberalization-which I have studied and analyzed for my entire
professional life.
Education
As Alfred Marshall-a founder of neoclassical economics-emphasized more than a
century ago, education is critical to economic progress.xix
In a period of accelerating technological change, boosting skills and the flexibility of the
labour supply may be as important for potential output growth as the size of the
workforce.xx Improvements to education and training will help make workers more
boost their employers'
productive, which should in turn overall productivity and lift the
economy's In Marshall's era,
potential. the main impediment to the quality of the labour
force was illiteracy. This was a huge obstacle to lifelong learning and self-improvement.
The vast majority of Canadians, of course, can read and have basic numeracy skills.
But this wasn't always the case. Our economy's transition around the turn of the
20th
century from agriculture to industry was facilitated by promoting public and private
investment in education that provided broader access. The question today is whether
education and training can equip a growing share of the workforce with the right skills
for an increasingly technology-driven economy.
While the challenge today may seem more daunting, it also appeared insurmountable in
Marshall's time. Yet, the expected private and social
returns were great, so investment
followed. History needs to be repeated. New technologies should be harnessed to
provide broad access to the types of education and training that will help Canadians
prosper amid rapid change. This would also help to address rising income inequality,
much of which is due to technological change that favours those with greater skills.xxi
Immigration
Higher immigration levels offer an obvious avenue for boosting potential by increasing
the supply of labour, given that immigration already accounts for two-thirds of the
Canada's Canada's immigration policy
growth in workforce. has long been considered a
success because of its record of attracting immigrants with the necessary skills to be
absorbed into the labour force and to make important economic contributions. This
approach will be particularly crucial going forward as the workforce gets older.
An important challenge, though, is whether Canada's immigration policy can raise the
levels accepted each year while continuing to be as successful as in the past at
matching immigrants' skills to the jobs that are available.xxii
As Governor Poloz noted
could be done to speed up immigrants' integration into the
recently, more workforce,
particularly given the elevated number of job vacancies in Canada.
Trade liberalization
Given demographic constraints, the most promising remedies for lifting potential may be
measures that stand to increase productivity.
This speaks not only to the importance of education, as I mentioned, but also to that of
creating a climate that encourages capital investment. This can be done through, for
example, infrastructure spending and other efforts to ease transportation constraints.
Perhaps most helpful in this regard, though, is trade liberalization. Our experience with
past and existing trade arrangements demonstrates the benefits of lowering barriers,
both external and internal, including improvements in productivity that supported growth
in the overall earnings of workers-a direct boost to living standards. As my Governing
Council colleague Tim Lane noted in remarks last September, expanding Canadian
firms' access to overseas markets spurs them to invest, innovate and increase their
productivity.xxiii
As in other advanced economies, there is renewed focus in Canada on ensuring that we
help the workers who are displaced by trade agreements. Again, education and training
can help people adjust. Still, there is no question that Canada has benefited from being
world's
one of the most diversified, trade-driven economies. Even as uncertainty about
US trade policy currently weighs on business investment and export growth, Canada's
recent agreements with the European Union and with countries in the Pacific region, in
addition to efforts at the interprovincial level, are helping reduce barriers and create
xxiv
opportunities for Canadian companies. Our history tells us that our firm commitment
to trade liberalization will remain important for supporting solid potential growth in the
future.
Conclusion
Allow me to conclude with three key messages.
First, potential output is an indispensable input into the formulation of monetary policy,
because the output gap is important in determining inflationary pressures in the
economy. Using the output gap as our guide has helped underpin the success of the
Bank of Canada's
inflation-targeting regime, which has, on average, delivered inflation
roughly at the 2 per cent target on a consistent basis for more than a quarter-century.
Bank's
Second, the multifaceted approach to measuring and using potential output-
drawing on diverse tools and on different sources of information-helps to manage
uncertainty and ensure reasonably robust estimates. This deliberate and regularly
updated approach has also contributed to our success.
Third, like other advanced economies, Canada faces important challenges to our policy
frameworks and to our economic prospects from lower rates of potential output growth.
Nonetheless, we have a rich history of generating economic opportunity and supporting
growth, and we should draw from past successes in developing future policies.
In closing, I mentioned earlier that although potential is mostly a function of longer-term,
slow-moving forces, the Great Recession had a severe and protracted impact on
potential output. With the economy now operating close to potential, solid demand
growth is spawning business investment, firm entry and improved labour-market
conditions-all of which are helping to repair that damage.
As noted in recent policy statements, we are closely monitoring this expansion in
economic capacity. It will help guide us in achieving our goal of low, stable and
predictable inflation, which is the best contribution monetary policy can make to support
sustainable growth and rising living standards in Canada.
i
The concept of output being largely determined by aggregate demand in the short run was a critical insight of
J.M. Keynes in his book The General Theory of Employment, Interest, and Money (London: Macmillan, 1936) and is
incorporated in most macroeconomic models employed by central banks.
ii
This identification strategy has been proposed by O. J. Blanchard and D. Quah, "The Dynamic Effects of Aggregate
Demand and Supply Disturbances," The American Economic Review 79, no. 4 (1989): 655-673. Demand shocks are
neutral for GDP in the long run, while supply shocks have permanent effects on GDP in the long run.
iii
See A. Agopsowicz, D. Brouillette, B. Gueye, J. McDonald-Guimond, J. Mollins and Y. Park, "Potential Output in
Canada: 2018 Reassessment," Bank of Canada Staff Analytical Note No. 2018-10 (April 2018).
iv
The fact that some workers are staying in the labour force longer is also partially offsetting the impact of an aging
workforce, although this effect is limited because older workers have lower employment rates than prime-age
workers and usually work fewer hours per week. Another factor suppressing TLI is the rising share of workers
employed in the services sector, where average hours worked tend to be fewer than in goods-producing sectors.
v
Some economists argue that the low-hanging fruit has already been picked, so productivity growth will remain
tepid despite advances such as automation and artificial intelligence. Others say because such technologies are
starting to be adopted more widely, large gains could be coming, and soon. See D. E. Sichel, "Two Books for the
Price of One: Review Article of The Rise and Fall of American Growth by Robert J. Gordon," International
Productivity Monitor 31 (fall 2016): 57-62; B. van Ark, "Total Factor Productivity: Lessons from the Past and
Directions for the Future," National Bank of Belgium Working Paper Research No. 271 (October 2014); B. van Ark,
"The Productivity Paradox of the New Digital Economy," International Productivity Monitor 31 (fall 2016): 3-18;
and R. J. Gordon "Comments on Daniel E. Sichel's Review Article on The Rise and Fall of American Growth,"
International Productivity Monitor 31 (fall 2016): 63-67.
vi
In a similar vein, the Bank also looks to multiple gauges for measuring underlying (or "core") inflation. See
L. Schembri, "Getting to the Core of Inflation" (remarks to the Department of Economics, Western University,
London, Ontario, February 9, 2017).
vii
Since the late 1990s, Bank staff have used a model called the extended multivariate filter (EMVF), which filters
out short-term business cycle movements to capture trends without offering an in-depth economic explanation for
them. A few years ago, staff developed an additional methodology called the integrated framework (IF), which
explicitly accounts for more long-term structural changes in the economy; notably, capital formation and
population aging. The IF, though, is limited in that one of its key inputs is the level of the country's capital stock,
which makes its projections sensitive to short-term fluctuations in investment. To further validate our estimates,
we recently adapted and employed two more models: the basic multivariate filter (BMVF), proposed by Blagrave
et al. in 2015, and the multivariate state-space framework (MSSF). The latter is an enhanced version of the BMVF
that is sufficiently flexible to incorporate a range of assumptions about economic relationships. See P. Blagrave,
R. Garcia-Saltos, D. Laxton and F. Zhang, "A Simple Multivariate Filter for Estimating Potential Output,"
International Monetary Fund Working Paper, WP/15/79 (April 2015); L. Pichette, P. St-Amant, B. Tomlin and
K. Anoma, "Measuring Potential Output at the Bank of Canada: The Extended Multivariate Filter and the Integrated
Framework," Bank of Canada Staff Discussion Paper No. 2015-1 (January 2015); and L. Pichette, M. N. Robitaille,
M. Salameh and P. St-Amant, "Dismiss the Gap? A Real-Time Assessment of the Usefulness of Canadian Output
Gaps in Forecasting Inflation," Bank of Canada Staff Working Paper No. 2018-10 (March 2018).
viii
Capital includes measures of machinery and equipment, engineering, and structures as well as three types of
"intangible" expenditures that are currently capitalized in Statistics Canada's national accounts data: research and
development, software, and mineral exploration and evaluation. Other intangible investments, such as
expenditures to build databases or to increase firm-specific human capital, are not currently capitalized and
included in the capital stock. For more information, see J. R. Baldwin, W. Gu and R. Macdonald, "Intangible Capital
and Productivity Growth in Canada," Statistics Canada Catalogue No. 15-206-X, No. 029 (2012).
ix
Estimates of TFP should be interpreted with caution. They are not solely measures of economic or technological
progress, but also include other factors such as measurement error.
x
We also do a less in-depth review for other major economies that are Canada's biggest trading partners. As new
data arrive between annual reassessments, especially for GDP and business investment, we regularly update the
starting-point level of potential output and sometimes also the growth outlook for Canada. We occasionally make
similar adjustments for these other economies. Any such changes are explained in the Monetary Policy Report. For
more detail, see R. Beard, A.-K. Cormier, M. Francis, K. Gribbin, J.-D. Guénette, C. Hajzler, K. Hess, J. Ketcheson,
K. Mo, L. Poirier and P. Selcuk, "Assessing Global Potential Output Growth: April 2018," Bank of Canada Staff
Analytical Note No. 2018-9 (April 2018).
xi
In our 2018 reassessment, we project that potential output growth will be 1.8 per cent from 2018 to 2020 before
inching up to 1.9 per cent in 2021-while showing each year's projection as the midpoint of a range. For 2018, the
range is plus or minus 0.3 percentage points, while for 2021 it is plus or minus 0.6 percentage points.
xii
The output gap is normally expressed as a percentage of potential output.
xiii
This conceptual framework for the relationship between the output gap and the deviation of inflation from
target is based on the expectations-augmented Phillips Curve, originally developed 50 years ago by Milton
Friedman. See M. Friedman, "The Role of Monetary Policy," American Economic Review 58, no. 1 (March 1968):
1-17. In practice, this relationship hinges critically on inflation expectations being well-anchored at our 2 per cent
target, which they are. This outcome reflects our success in using this framework since 1991 to achieve our
inflation target. As a result, the target has become very credible. See L. Schembri, "Anchoring Expectations:
Canada's Approach to Price Stability" (remarks to the Manitoba Association for Business Economists, Winnipeg,
Manitoba, February 15, 2018).
xiv
See L. Schembri "Anchoring Expectations: Canada's Approach to Price Stability" (remarks to the Manitoba
Association for Business Economists, Winnipeg, Manitoba, February 15, 2018). Also, for a discussion of
demographic effects in particular, see S. Ambler and J. Kronik, "Faulty Transmissions: How Demographics Affect
Monetary Policy in Canada," C.D. Howe Institute, Commentary No. 506 (March 2018).
xv
The neutral policy rate is measured as the equilibrium real interest rate plus the 2 per cent target inflation rate.
The policy rate has declined because of a decrease in the equilibrium real interest rate, which has occurred as
lower potential output growth has reduced the demand for investment. For further deta