Economics 1022A/B Lecture Notes - Lecture 21: Open Market Operation, Foreign Exchange Market, Overnight Rate

• School: Western University
• Department: Economics
• Course: Economics 1022A/B
• Professor: Jeannie Gillmore

Document Summary

The ba(cid:374)k(cid:859)s (cid:373)ai(cid:374) e(cid:373)phasis is to a(cid:448)oid i(cid:374)flatio(cid:374). A monetary policy strategy in which the central bank commits to an explicit inflation target and to explaining how its actions will achieve that target is called inflation rate targeting. Critics argue that by focusing on inflation, the bank of canada sometimes permits the unemployment rate or real gdp growth to suffer. But the last time the bank created a recession was at the beginning of the 1990s. Since that time, monetary policy has been sensitive to the state of employment while maintaining its focus on achieving its inflation target. The bank can decide to control the quantity of money, the price of canadian money on the foreign exchange market, or the opportunity cost of holding money (the short-term interest rate). The specific interest rate that the bank targets is the overnights loans rate.