Class Notes (838,400)
Canada (510,881)
York University (35,470)
Economics (1,721)
ECON 1010 (200)
Xueda Song (22)
Lecture 9

lecture 9: monetary policy

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Department
Economics
Course
ECON 1010
Professor
Xueda Song
Semester
Winter

Description
Lecture Nine Monetary PolicyMarch 20 2012Background to the Bank of CanadaOn eight preset dates a year the Bank of Canada announced whether the interest rate will rise fall or remain constant until the next decision dateHow does the Bank make its interest rate decisionWhat does the Bank do to keep interest rates where it wants themDoes the Banks interest rate change influence the economy in the way the Bank wantsCan the Bank speed up economic growth by lowering interest rates and keep inflation in check by raising themMonetary Policy Objective and FrameworkCanadas monetary policy objectives and framework for setting and achieving that objective stems from the relationship between the Bank of Canada and the government of CanadaMonetary Policy ObjectivesThe objective of monetary policy is ultimately politicalIt stems from the mandate to the Bank of Canada which is set out in the Bank of Canada Act 1935Basically the Banks job is to control the quantity of money and interest rates in order to avoid inflation and when possible prevent excessive swings in real GDP growth and unemploymentJoint Statement of the Government of Canada and the Bank of CanadaThe agreement is1The inflationcontrol target 13 percent per year2Keep trend inflation at the 2 midpoint3The agreement will run for five years and will be renewed sometime during 2011Such a monetary policy strategy is called inflation rate targeting Interpretation of the Agreement The inflationcontrol target uses the CPI as the measure of inflationSo the Bank has agreed to keep the CPI at a target of 2 a yearBut the Bank also plays close attention to core inflation which it calls its operational guideThe Bank believes that core inflation is a better measure of the underlying inflation trend and better predicts future CPI inflationHistorically the actual CPI inflation rate has only rarely gone outside the target rangeThe Bank has held CPI inflation to its target with only small and temporary deviationsRationale for InflationControl TargetTwo main benefits flow from adopting an inflationcontrol target1Fewer surprises and mistakes on the part of savers and investors2Anchors expectations about future inflationControversy About the InflationControl TargetCritics of inflation targeting fear that1By focusing on inflation the Bank might permit the unemployment rate to rise or real GDP growth to slow2The Bank might permit the value of the dollar rise on the foreign exchange market and make exports sufferSupporters of inflation targeting respond
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