counter the effects of the pandemic will clearly lead to higher indebtedness, for governments in particular. getting the economy back onto its growth track — which is what is required if we are to hit our inflation target — is the surest means of servicing those debts over time. with the situation more like a natural disaster than a recession, there is reason to expect confidence to be buttressed by fiscal income supports and a reasonably swift return to growth for significant segments of the economy. any structural damage, such as business failures and labour market scarring, will of course take longer to repair. the extreme uncertainty we face today gives an added sense of urgency to the research being done at the bank and elsewhere. this research will help us better understand some crucial issues as risk management continues to evolve. ongoing research related to uncertainty includes work looking at spillovers in times of uncertainty29 and how macroeconomic uncertainty can lead firms to defer hiring. of course, the bank also continues to work on the nexus between monetary policy and financial stability. we are working toward a better understanding of how vulnerabilities affect policy transmission. there is new modelling work k. tuzcuoglu and l. uzeda, “ measuring aggregate and sectoral uncertainty, ” bank of canada staff working paper, forthcoming. - 17 underway to dig into the today - versus - tomorrow trade - off that is created by vulnerabilities. 30 enhancing our understanding of real financial linkages will continue to be at the forefront. we have already learned a lot about the importance of taking into account household heterogeneity, including issues related to demographics and differences in income, debt and wealth. 31 our research will take advantage of microdata to develop a deeper understanding of how household heterogeneity matters for monetary policy transmission. heterogeneity is also important for reducing our uncertainty about macroeconomic fundamentals. the size of a firm can affect access to credit through the business cycle. supply - chain structures can be relevant for the impact of monetary policy and fiscal policy on investment, exports and imports. again, microdata will improve our understanding. 32 this work will enhance our modelling of the macroeconomy and also improve our representation of the macroeconomy in our financial stability tools. moreover, a number of research projects are helping us close in on a model that includes a wider variety of financial system variables and financial stability metrics than our current macro models have. this won

, describes the fed ’ s approach to policy as having “ three important parts : monitoring risks ; balancing risks, both upside and downside ; and contingency planning for surprises. ” 15 possibly a better description of risk management would be to call it a “ common sense approach, ” since it reflects reality rather than the elegance of economic theories. over the years, we at the bank have increasingly viewed monetary policy through a risk - management lens. and this has led to a wide variety of changes in processes and procedures and has sparked many key avenues of research. what i ’ d like to do now is go through two case studies from the past seven years, show how risk management applied to each situation and talk about changes in our processes that emerged. then, i will turn to monetary policy and the unknowable implications of the pandemic. case study 1 : the oil price shock of 2014 – 15 let us look back at the oil price shock of 2014 – 15. in 2014, amid signs of improving business investment and exports, real gross domestic product was expanding at a rate above its estimated potential. core inflation rose through the year to around 2 percent. following a prolonged period of low interest rates, household spending was robust, and canada continued to experience rising prices in key housing markets and increasing risks from elevated levels of household indebtedness. against this backdrop, west texas intermediate oil prices fell by roughly half, from a peak of more than us $ 100 per barrel near the end of the second quarter to about us $ 50. by the last quarter of 2014, the marked decline in global oil prices posed a significant downside risk to the canadian economy and inflation. j. h. powell, “ monetary policy and risk management at a time of low inflation and low unemployment ” ( remarks delivered at the “ revolution or evolution? reexamining economic paradigms ” 60th annual meeting of the national association for business economics, boston, ma, october 2, 2018 ). - 9at the same time, an important upside risk was the possibility of a more robust recovery in the united states. finally, a key two - sided risk was the possibility of greater - than - expected strength in housing and consumption, which would boost canadian economic growth while increasing the likelihood and potential severity of a correction later on. all of this presented a complex mix of risks to weigh. through 2014, we judged that the risks to our inflation projection were roughly balanced, while the financial stability risks associated with household