9 While earlier studies often found that the implied welfare costs associated with this behaviour, measured in terms of lost consumption or some other metric, were relatively small, Bank of Canada researchers have extended this work in a number of important ways and reported much larger effects.
These extensions included: (i) incorporating more realistic wage dynamics into New Keynesian models; (ii) adding growth to standard steady-state analyses; and (iii) allowing for trend increases in inflation. The effect, in almost every instance, was to strengthen the case for a very low – if not slightly negative – target rate of inflation. 10  8  See Cao et al (2009).