interest rate 46 times, and only four of these were reversals within a six - month window. if you look at the behaviour of other central banks, it is very similar — so it is not much of a surprise that other central banks have also cited uncertainty as a rationale for waiting. 16 for the business people in the room who have considered large capital expenditures, this reasoning must sound familiar. it can be useful to have the option value of waiting until you are more sure of the returns. this is particularly true if the investment is largely irreversible. as with investment, fixed costs of changing policy direction may explain a central bank ’ s aversion to reversals and motivate a wait - and - see approach to policy. that said, it is unclear how costly policy reversals are for the real economy. it is possible that the perceived costs are selfreinforcing because reversals are so rare that they are viewed as policy errors when they do occur, rather than as a sensible reaction to new information. uncertainty is not a reason for paralysis in decision making now for my final point. uncertainty is not a reason for paralysis in decision making. whether it is about how aggressive or how cautious policy should be, getting the dosage right demands sound judgment about complex trade - offs. just think about my last example about the wait - and - see approach. in central banking, there is no equivalent to the “ late - mover advantage. ” but even for a business, delaying investment too long leaves it vulnerable to the competition. checking the logic of this judgment through formal modelling exercises is good practice to inform our assessment of these trade - offs and to support decisions that stand the test of time. that is why research efforts at the bank are focused on some key areas. in particular, we are working to better model the dynamics between the real and financial sides of the economy, particularly the triggers for financial instability. this continues to be a blind spot. related to this is work to measure the effectiveness of macroprudential measures and unconventional monetary policy tools. there is also significant work under way studying inflation and wage dynamics, as governor stephen poloz spoke about last week in montreal. a longer - term objective relates to incorporating the effects of uncertainty that households and businesses face in their own decision making. these efforts will help improve base - case projections. 4 / 6 bis central bankers'speeches we supplement these projections with model - based risk scenarios. for example, bank staff

the joint statement of the government of canada and the bank of canada on the renewal of the inflation - control target. 3 see the appendix in the october 2017 bank of canada monetary policy report for details on recent enhancements to totem, one of the bank of canada ’ s main projection models. 4 in most cases, central bank models do not use fully optimal rules for projection purposes, so the resulting policy path implied by these models is not certainty - equivalent, in the strict sense. here, we mean that by construction the parameters and functional forms of the policy rule, however chosen, do not change as uncertainty is introduced. 5 certainty equivalence applies to linear - quadratic frameworks. the central bank is assumed to have a zone quadratic loss function ( i. e., it seeks to minimize inflation from the target and cares equally about deviations above and below the target ), the model is linear and shocks are additive ( i. e., they do not change the underlying structure of the economy ). 6 see box 1, “ potential implications of a rise in trade protectionism ” in the april 2017 bank of canada monetary 5 / 6 bis central bankers'speeches policy report. 7 the intuition behind this is demonstrated clearly in r. kato and s. - i. nishiyama, “ optimal monetary policy when interest rates are bounded at zero, ” journal of economic dynamics and control 29, no. 1 – 2 ( 2005 ) : 97 – 133. 8 for the bank of canada ’ s unconventional monetary policy toolkit, see the framework for conducting monetary policy at low interest rates published in december 2015. 9 in its announcement on april 23, 2009, the bank made the following conditional commitment : “ conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. ” 10 some estimates for the united states are as high as 40 per cent. much of this difference with canada can be explained by differences in methodology rather than fundamentals. for example, raising the assumption of the elb to zero and reducing the degree of interest rate smoothing to zero in the policy rule increases the estimate of the probability to around 25 per cent for canada. for an explanation on how the probability of being at the elb is calculated, see j. dorich, n. labelle st - pierre, v. lepetyuk and r. mendes, “ could a higher inflation