Corporate Canada’s propensity for cash hoarding may be doing more than just holding back Canada’s economic recovery. It may be behind Canada’s unusually low inflation trend, too.
In a new paper Wednesday from the C.D. Howe Institute that explores Canada’s prolonged period with below-trend inflation (it’s been two years since the core inflation measure was as high as the Bank of Canada’s 2-per-cent target), author Mati Dubrovinsky notes that the historical relationship between inflation and money supply has broken down in the post-recession period. While money supply expanded due to a monetary policy of prolonged low interest rates, this didn’t result in a rise in kind of inflation.