If it is generally expected that lower levels of short-term interest rates will lead to higher inflation, long-term interest rates are bound to rise. Monetary policy may therefore be less effective in having the desired impact on real economic activity over the short term than generally believed.
Indeed, over the period from 1997 to 2001, Canada averaged annual economic growth of about 4 per cent, while the U.S. average was about 3.5 per cent. And while the U.S. economy fell into recession last year, ours did not.