New study reveals key indicator for predicting future inflation and deflation.
The article estimates interest rates in Canada to help guide monetary policy. By comparing the actual rate set by the central bank with an equilibrium rate, the authors can predict future inflation or deflation. They use a model to calculate the interest rate gap, which shows how future economic activity might unfold. The results suggest that this gap is a useful tool for policymakers and can predict future output and inflation just as well as other common measures.