Also, for a discussion of demographic effects in particular, see S. Ambler and J. Kronik, “Faulty Transmissions: How Demographics Affect Monetary Policy in Canada,” C.D. Howe Institute, Commentary No. 506 (March 2018). xv The neutral policy rate is measured as the equilibrium real interest rate plus the 2 per cent target inflation rate.
The policy rate has declined because of a decrease in the equilibrium real interest rate, which has occurred as lower potential output growth has reduced the demand for investment. For further details, see R. Mendes, “The Neutral Rate of Interest in Canada,” Bank of Canada Staff Discussion Paper No. 2014-5 (September 2014).