As you would expect, the economy would then have two sources of stimulus – higher prices for oil exports and ultra-low interest rates, which would have boosted borrowing and spending. This combination would have overheated our economy during 2006–08, and inflation would have begun to rise above our target. We estimate that inflation would have been approaching 4 per cent by 2008.
As an aside, let’s talk about what actually happened in 2008 – the global financial crisis. While it’s tricky to introduce a slice of reality into a hypothetical scenario, it is worth noting that if our interest rates were already near zero, we clearly would have had no room to manoeuvre. But let’s set aside that complication, and finish our “what-if?” scenario.