Trends in Productivity Growth in Canada

Abstract

• Because of the lag in the effect of monetarypolicy on spending and inflation, policydecisions are necessarily based upon anuncertain view of how the future will unfold.• At the Bank of Canada, the staff use economicmodels mainly to help construct forecasts ofthe most likely evolution of the Canadianeconomy, particularly the extent of futureinflationary pressures. Many of these modelsalso produce recommended paths for the targetovernight interest rate.• Economic models represent a deliberateabstraction from a complex reality. Theycombine those behavioural relationshipsbelieved to be responsible for the bulk ofmacroeconomic fluctuations, while omittingthose deemed less important. This process ofdifferentiation allows economists to makepredictions that are reasonably accurate andthat can be more easily understood andcommunicated.• The models used at the Bank are flexible toolsthat can be adapted to incorporate differentassumptions or additional informationobtained from other sources.• A multiple-model approach helps to mitigatethe effects of model uncertainty.

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