Neutral rate of interest in a small open economy: The case of Canada

The neutral rate of interest is an important concept and communication tool for central banks. We develop a structural macroeconomic model to study the determinants of the neutral real rate of interest in a small open economy. The model captures domestic factors such as population aging, declining productivity, rising government debt, and inequality. Foreign factors are captured by changes in the global neutral real rate. We use the model to evaluate secular dynamics of the neutral rate in Canada from 1980–2018 and find that changes in both foreign and domestic factors resulted in a protracted neutral rate decline.