34. Household debt and monetary policy

Monetary policy, as we teach it, is not affected by the level of household debt. Turns out we should be teaching something different. Bank of Canada Governor says the bank may react to the high level of household debt in Canada by raising interest rates.

There is no straightforward way of incorporating household debt into monetary policy. The reason for the statement is the concern that debt is getting too high, creating risks in the economy. As the mandate of the Bank of Canada is to maintain inflation rate around 2%, household debt should not matter. But apparently it does.

What this means is that the Bank of Canada, in its conduct of monetary policy, learned some lessons from the Great Recession (or, more precisely, the prelude to the great recession) and is now going to react to bubbles.