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ECON 291 (14)
Chapter 14

Chapter 14: Bank of Canada and Monetary Policy

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ECON 291
Geoff Dunbar

Chapter 14 Bank of Canada and Monetary PolicyBoC was created in 1934 as a result of a recommendation by a Royal CommissionThe BoC is now a Crown CorporationFigure 1The governor is responsible for making monetary policy decisions although he acts after consultations with the deputy governors and advisors142 Monetary Control in Canada Tools of Monetary Policy1Overnight Rates aka the hammeroRecall that charter banks and some others13 in total clear their mutual debts using accounts at the BoC The funds in these accounts are called settlement balances Other financial institutions participate via LVTSoBanks that hold accounts at the BoC are known as direct clearersoDirect clearers are required to maintain an average of zero on deposits over a 30day periodoThus there is an active overnight lendingborrowing marketoThe interest rate at which banks borrow and lend in their settlement accounts is known as the overnight rateoThe BoC announces a target band for the overnight rateoThe top rate of the band is the rate at which the BoC will lend overnight This is the Bank rateoThe bottom rate of the band is the rate at which the BoC will borrowoThere is no limit to the amount the BoC will borrow or lend oBy adjusting the target band the BoC can adjust shortterm interestrates2Open Market OperationsoSometimes the BoC wishes to target an overnight rate in the middle of the target bandoTo do this it uses Special Purchase and Resale Agreements SPRAs or reposor Sale and Repurchase Agreements SRAsoWith SPRAs the BoC buys a shortterm govt security usually a Tbill from a bank and agrees to sell them back the following day When it buys Tbills it pays for them using settlement accounts thus increasing the supply of balances thus decreasing the overnight rateoSame idea for SRAs3Exchange Fund AccountoThis is the account that the BoC uses to intervene in foreign exchange marketsWhat does the Bank target1Inflation
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