risk that the neutral rate is so low in some economies that the effective lower bound is preventing central banks from providing sufficient monetary stimulus. they argue that the structural factors that are responsible for the low neutral rate could persist well into the future, contributing to “ secular stagnation. ” in canada, with the target for the overnight interest rate currently set at 0. 5 per cent, we judge monetary policy to be quite stimulative, although less so than it would have been a decade ago when the neutral rate was higher. at the same time, as population aging continues, the neutral rate could fall further, unless productivity growth picks up or global savings fall. and the longer weak investment persists, the more important this risk becomes. the link between slow growth and financial stability while we typically link financial stability risks to unsustainably high growth, slower growth and lower returns can also add to vulnerabilities in the financial system through a number of channels. let me talk about three. the first is a macroeconomic channel that works through households. years of low interest rates have, by design, encouraged growth in household credit, leaving many highly indebted. in canada, average household debt is around 165 per cent of disposable income. as average household income growth slows, we can expect that economic shocks — such as foreign demand shocks that reduce demand for exports or changes in commodity prices that adversely affect a country ’ s terms of trade — will result in more frequent and longer periods of shrinking incomes. this is due to two related factors. the first is just simple arithmetic : the lower the average growth rate of household income, the more likely it is adverse shocks will push it negative. the second factor is a bit more subtle. a lower neutral rate also makes it more likely that interest rates will be constrained by the effective lower bound, meaning monetary policy will have less scope to support income growth during periods of economic weakness. to get a better sense of the practical importance of these factors, we ran simulations with the bank of canada ’ s main policy model. 12 they show that, for canada, the lower neutral rate means that the probability of being at the effective lower bound — which we assume to be – 0. 5 per cent — has gone up from around 1 1 / 2 per cent to around 7 per cent. 13 our simulations also confirm that there would be more episodes when the income of workingage individuals actually declined. and the median duration of those episodes would

at a given point in time. 11 while we expect retirees to transition from saving to dissaving, our research finds this is only a partial offset. r. r. mendes, “ the neutral rate of interest in canada, ” bank of canada staff discussion paper no. 2014 – 5 ( september 2014 ). 12 the terms - of - trade economic model ( totem ). the simulation results are based on the same distribution of shocks as observed over the 1995q1 – 2015q2 sample. canada ’ s potential gdp growth is estimated to have fallen from just under 4 per cent in 2000 to around 1 1 / 2 per cent today. 13 the simulations also show that the average time spent at the effective lower bound would increase from about 1. 5 to 6. 5 quarters. 14 e. takats, “ ageing and asset prices, ” bank for international settlements working papers no. 318 ( august 2010 ). 15 in countries such as canada, australia and new zealand, population growth, migration and urbanization have contributed to a rise in house prices since the mid - 1990s. see l. schembri, “ the long - term evolution of house prices : an international perspective ” ( speech to the canadian association for business economics, kingston, ontario, 25 august 2015 ). 16 when the neutral rate falls, asset prices should rise, all else being equal, because the rate at which future cash flows are discounted declines. the gains in asset prices would help buffer the initial impact on pre - existing holders of assets. nevertheless, over time, lower returns would be unavoidable. 17 for surveys of the literature, see r. h. defina, “ the link between savings and interest rates : a key element in the tax policy debate, ” federal reserve bank of philadelphia business review ( november / december 1984 ) : 15 – 21 ; and l. rachel and t. d. smith, “ secular drivers of the global real interest rate, ” bank of england staff working paper no. 571 ( december 2015 ). 18 according to a 2015 survey conducted by mercer, the average funding level for pension funds sponsored by s & p 1500 companies is 79 per cent. by comparison, the funds were fully funded before the global financial crisis. see www. mercer. com / newsroom / september - 2015 - pension - funding. html. 7 / 8 bis central banker's speeches 19 for a discussion of those risks, see s. ramirez, j. s