Wednesday, 6 March 2013

Part II - Canada and US monetary policy - a Market Monetarist perspective

This is short post comparing Canada and US nominal GDP growth since the financial crisis.  It is an update to my May 2012 post (here) that compares the relative monetary policy stance in both countries taking a market monetarist perspective.  To recap, market monetarists claim NGDP growth is a better monetary policy indicator than interest rates.

The graph shows annual Canada and US NGDP growth since NGDP bottomed in both countries in Q2-2009, at which time NGDP was 7.5% and 3.7% below levels a year earlier in Canada and the US respectively.   In Q2-2010, NGDP growth in Canada began to exceed US levels, indicating a relatively easier monetary policy stance in Canada.  However, by Q1-2012, Canada’s NGDP growth began to decline below US levels, and by Q4-2012, annual NGDP growth in Canada was a paltry 1.9%, compared to (a still low) 3.5% rate in the US.

From 2000 to 2006, Canada and US NGDP growth averaged around 5.1%.  Assuming this growth rate in nominal spending qualifies as a neutral monetary policy, monetary policy has been too tight in the US since the financial crisis, and in Canada since the beginning of 2012.

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