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Lecture 34

ECON 102 Lecture Notes - Lecture 34: Monetarism, Money Multiplier, DeflationPremium

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ECON 102
Robert Gateman

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Econ 102 Lecture 34 Monetary Policy in Canada Cont
a. The Exchange Rate
i. Change in e can affect inflation and the gap
ii. BOC response will depend on the cause of the change
iii. BOC avoids altering M-Policy to affect e
iv. 3% delta e = the effect of a 1% delta i-rates on GDP
v. I-rates ←→ e-rates
b. Regional Differences in Canada
i. AB overheated; ON cooling off
c. What Monetary Policy cannot do
i. Identify and correct asset price misalignments
ii. Stabilize exchange and inflation rates at the same time
iii. Mitigate differences in regional/sectoral growth rates
2. Lags in Monetary Policy
Causes of long and variable monetary policy time lag:
a. Effect on M takes time - money multiplier process
b. Effect on AE takes time - effect of deltai on spending
c. Effect on AD takes time - expenditure multiplier process
Monetarists - lags short and predictable
Keynesians - lags longer and unpredictable
Consequently, many view M-Policy as a blunt instrument which may have a
destabilizing effect Like pushing on a string”
3. History of Monetary Policy
30 years of canadian Monetary Policy
1983-87 Economic Recovery Re-entry
Economy:1982 inflation = 12%; economy in recession
Policy: BOC needs to provide sufficient liquidity to accommodate recovery, without
triggering inflation (today?)
BOC has short sharp” increase in Ml not trigger expectations
Effect: fairly successful
1987-90 Rising Inflation
Economy: starting to overheat - Y growing, U falling, P rising
Policy: John crow - announces that goal of BOC is LR price stability rather than SR
stabilization - BOC runs tight money to fight inflationary expectations
Effect: inflation still rises from 4-5% and world recession
1991-2000 Inflation Targeting I
Economy: 1991 world recession; many argue to easy M-Policy
Policy: announces Inflation Target in 1991. But, cost of fighting inflation was a
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