Are Canadian Interest Rates Too High?

This paper examines the proposition that tight money anti-inflation policy by the Bank of Canada has kept Canadian interest rates high relative to interest rates in the United States during the past few years. It adopts an analytical framework that emphasizes the integration of Canadian asset markets with those abroad--a different perspective from that on which most contemporary policy discussions are based. On the basis of available evidence it concludes that this proposition is very difficult to defend. It also argues that, due to the problems of forecasting both future movements in the economy and the magnitude and timing of the Bank's influence on it, aggressive expansionary policies in recessions like this most recent one would probably do more harm than good.