2016-10 Canada’s Big Bet on Stimulus Draws Global Attention

In yesterday's WSJ there was a long article on Canada's stimulus program.
Some background:

• after the Great Recession, growth in most developed countries has been slow. In Canada in recent years the additional break on growth was the decline in resource prices
• to get out of recession, most countries relied on monetary policy.  Central banks reduce interest rates to near zero. Interest rates remained at record lows ever since. This means that monetary policy is not as useful as it once was, as interest rates cannot be reduced much.

We will be discussing it in more detail at the end of the course (chapter 10)

• As debts increased during the recession and its aftermath, there was little stimulus spending. Many countries introduced austerity policies to reduce deficits.

We will be discussing it in more detail at the end of the course (chapter 11)

• In Canada, there was a significant increase in fiscal spending in 2009-2010 ($47 billion).
• With the exception of Japan, few countries are engaged in fiscal stimulus.
• Unlike other countries, the new Canadian  government embarked on significant stimulus spending: $10 billion a year for  10 years. A big portion will be on infrastructure
• Why such a long horizon? Two reasons:

- Canada is in for a long period of slow growth. So it needs a long period of fical stimulus;
- a long horizon will allow to choose good projects;

• Other countries are looking at how things would work in Canada. Interest rates are at record low, so it is a good time for the government to borrow to stimulate the economy.