SOURCE: The Fraser Institute

The Fraser Institute

February 11, 2016 05:30 ET

Fraser Institute News Release: The Bank of Canada's Power to Influence Interest Rates Has Been Greatly Diminished

VANCOUVER, BC--(Marketwired - February 11, 2016) - Changing demographics across the globe -- not monetary policy -- are the main drivers of low interest rates in many of the world's largest economies, finds a new study released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

"Monetary policy is having less and less impact on interest rates in developed economies such as Canada because the demographic relationship between borrowers and savers has changed dramatically," said Dr. Michael Walker, author of Why Are Interest Rates So Low?, a ground-breaking study that develops a new model of how interest rates are determined.

For most of the 20th century, there were many more borrowers than savers. Subsequently, interest rates were high to encourage more saving and ration the scarce funds to borrowers.

Today, however, the opposite is true. There's a dearth of borrowers -- so savers are relatively more numerous.

According to the study, the existence of relatively more savers attempting to invest their funds is the main factor affecting interest rates -- not monetary policy conducted by the Bank of Canada or the Federal Reserve.

The study compiles financial and demographic data for 29 countries that account for nearly 90 per cent of the world's economic output. Walker's new model of how interest rates are determined differs from popular, yet faulty, economic models, which rely on the use of "typical households" to project economy-wide responses to factors thought to influence interest rates.

Relying on these faulty models, many analysts have predicted that interest rates will return to normal levels sometime soon. And central banks have tried to "talk up" interest rates. Meanwhile, rates in most of the major economies continue to be very low.

"The objectives and behaviour of 'typical households' in Canada and most of the world is dramatically different today than when these now-faulty models were constructed, so it's no surprise that most private analysts and central banks have incorrect expectations," Walker said.

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of think-tanks in 87 countries. Its mission is to improve the quality of life for Canadians, their families and future generations by studying, measuring and broadly communicating the effects of government policies, entrepreneurship and choice on their well-being. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org

Contact Information

  • MEDIA CONTACT:
    For interviews with Dr. Walker, please contact:
    Aanand Radia
    Media Relations Specialist
    Fraser Institute
    (416) 363-6575 ext. 238
    aanand.radia@fraserinstitute.org 
    @FraserInstitute