. for example, using a shorter - run concept, carney ( 2013 ) concludes that “ the equilibrium real interest rate [ in the u. k. ] has been, and continues to be, negative. ” shorter - run definitions of neutral are more useful as normative measures of the currently warranted policy rate than as tools for gauging the degree of stimulus in the economy. given the headwinds faced by the canadian economy, shorter - run measures of neutral in canada would currently be well below the 3 to 4 per cent range for longer - run neutral rates. this is reflected in the banks ’ policy stance. see r. mendes, “ the neutral rate of interest in canada, ” discussion paper no. 2014 – 5, bank of canada 2014 ; and m. carney, “ the spirit of the season ” ( speech to the economic club of new york, new york, 9 december 2013 ). for a more detailed explanation, see technical box 2, headwinds, tailwinds and the policy rate, monetary policy report, july 2011. bis central bankers ’ speeches as i said earlier, proponents of the secular stagnation interpretation of events believe that the factors restraining demand are a larger and more permanent feature of the global economic landscape. if they turn out to be right, the real neutral rate could actually be negative and monetary policy could be a lot tighter than we think it is. while we cannot completely discount this possibility, we believe that in canada the real neutral rate is still positive and that, globally, monetary conditions are generally stimulative, although they vary across countries. 11 challenges for monetary policy our estimates of potential and the neutral rate, and the models in which they are used, are critical inputs to our policy deliberations. they are not the end of the story, though. we also ask ourselves how various sources of uncertainty should influence these deliberations. and we clearly articulate the main upside and downside risks to our base - case outlook for inflation. that is what we mean when we talk about our risk - management approach to monetary policy. as the economy recovers and we get closer to full capacity, judgments about potential output and the remaining slack in the economy become more important. so do judgments about the neutral rate and the amount of monetary policy stimulus. inflation could surprise on the upside if there were less slack and more monetary stimulus than we think. we watch developments in inflation carefully to distinguish between temporary and lasting effects. fortunately

not embed leverage, and credit risk is eliminated by the government guarantees. by contrast, activities at the riskier end of the continuum would include highly complex, opaque and leveraged securities, such as some of the non - bank - sponsored, asset - backed commercial paper ( abcp ) that existed in canada prior to the crisis. the size and composition of shadow banking also vary across jurisdictions, partly in response to the structure and regulation of the banking system. in canada, at the end of 2010, the most prominent mbf activities were repurchase agreements ( repos ), which accounted for over half of total mbf liabilities. this was followed by mortgage - backed securities, at about one quarter of the total, and short - term debt instruments, at less than 10 per cent. in the united states, in comparison, government - sponsored enterprises, money market mutual funds and asset - backed securities represent the major components of the overall mbf sector. canada and the united states also differ in the role that regulated financial institutions play in mbf activities. in canada, regulated financial institutions are dominant players. in addition, the widespread use of government, or government - guaranteed, securities as collateral to underpin these transactions ( both repos and mortgage - backed securities ) make the sector in canada relatively less vulnerable. key vulnerabilities in market - based financing generally speaking, there are two main concerns with mbf activities : the opportunity for regulatory arbitrage and the possibility of systemic risk. the first one is straightforward : shadow banking activity can be used to circumvent and undermine banking regulations. this may become increasingly important given the new basel iii standards for bank capital and liquidity coming into force. the second concern reflects a number of vulnerabilities inherent in mbf, perhaps the most important of which is exposure to panics. entities that rely on mbf are exposed to liquidity crises that resemble a classic bank run. this is owing to their funding structure, with the important difference that mbf lenders are not protected by deposit insurance, and mbf borrowers typically do not have direct access to central bank liquidity. the 2007 crisis in the canadian market for non - bank - sponsored abcp was a prime example of how a liquidity crisis can unfold. short - term instruments were used to fund illiquid, risky and long - term assets. those instruments also embedded significant leverage. when signs of trouble emerged, investors shied away from abcp