• Fiscal multipliers are as large right now as they can be
  • Poloz says he's not concerned about recent U.S. dollar changes

Bank of Canada Governor Stephen Poloz defended the central bank’s decision to assume relatively large multipliers from Canada’s new fiscal stimulus, citing slack in the economy that will limit any crowding out. Here are highlights from two press conferences that Poloz gave in Washington last week.

Equilibrium Multipliers

The size of the fiscal multiplier depends on the “situation you start in.” When the economy is in equilibrium, government spending triggers higher interest rates and higher currency, crowding out private spending.

In equilibrium, fiscal policy “has no effect except it changes the mix of what is going on in the economy. So this gives rise to sort of cavalier statements from some that would say, ‘well that won’t have any effect.”’

Multipliers Today

In low growth settings, “fiscal policy begins to add demand in the economy (and) basically nothing else happens except that demand goes up and what happens then is that you get the maximum effect of fiscal policy because there are no offsets such as upward creep in interest rates or movement in the exchange rate.”

Monetary policy is also at its “natural limits” and that means “you get the sense of monetary policy having a little less oomph than it normally has and fiscal policy having the most it can have.”

U.S. Dollar Weakness

Poloz said he’s not concerned about recent movements in the U.S. dollar.

“We’re in a situation where the world is working its way through the lower commodity price scenario. That’s where we’ll have countries who are exporters of commodities, their currencies will have a tendency to decline, and those that import will have a tendency to rise. Those are not cut-and-dried, minute-by-minute scenarios but those will be the tendencies. So we are in a situation where flexible exchange rates really help that adjustment process.”

“Now not every economy is in the same starting point. As those adjustments happen they happen at different speeds. A couple of steps forward, one step back. I just think in general people appreciate flexible exchange rates are a good thing but when they are moving sometimes markets move them farther than you thought they might. So you kind of get a bit of angst around it. Markets then have their one step back after the two steps forward. I think it’s perfectly natural.”

Declining Global Trade

A big part is “because the global economy itself is slow, as opposed to trade causing the slowdown. It’s the slowdown causing the slow trade.”

“It’s particularly the case that investment spending is highly dependent on trade. Capital goods full of components that come from all over the place, so when investment slows down -- and we know there is slow investment globally -- then trade slows down disproportionately.”

External Risk

“The biggest external risk I’d say for us is the emerging markets as a group go through another bout of market volatility perhaps like we had in the first six weeks of this year and one that is more prolonged that has a sort of feedback effects that causes them to falter further because any recoveries that are there are at an early stage or are fragile.”

Bank Toolkit

“There is a pretty general agreement among the central bankers that we all have ammo, we have room to maneuver and I guess its fair to say we have discovered we have more room to maneuver than we thought we had five years ago.”

On Mood at G-20

“I come away feeling a little bit more encouraged then when I arrived.”

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