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EC140 (329)
Chapter 30

Chapter 30 EC140.docx

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Angela Trimarchi

EC140 Chapter 30 – Monetary Policy Week 12 Monetary Policy Objective and Framework Monetary Policy Objective -Bank of Canada Act – regulate credit and currency in the best interests of the economic life of the nation…and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action -The bank’s job is to control the quantity of money and interest rates in order to avoid inflation and, prevent extensive swings in real GDP growth and unemployment -Joint Statement of the Government of Canada and the Bank of Canada – The inflation control target range will be 1-3% a year, policy will aim at keeping the rend of inflation at the 2% target midpoint, the agreement will run for five years and be reviewed before the end of 2011 -The inflation control target uses the CPI Responsibility for Monetary Policy -The government of Canada and the Bank of Canada jointly agree on the monetary policy target -The current governor is Mark Carney The Conduct of Monetary Policy Choosing a Policy Instrument -The Bank of Canada 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 Bank of Canada cannot set all three -The bank must decide which of these three instruments to use The Overnight Rate -The specific interest rate that the Bank of Canada targets is the overnight loans rate, which is the interest rate on overnight loans that members of the Large Value Transfer System make to each other -The Bank can change the overnight rate by any amount it chooses, it normally changes the rate by only a quarter of a percentage point The Bank’s Decision-Making Process -Two alternative decision making processes might be used: the Instrument rule, or the Targeting rule -Instrument rule – a decision rule for monetary policy that sets the policy instrument at a level that is based on the current state of the economy -Targeting rule – a decision rule for monetary policy that sets the policy instrument at a level that makes the forecast of the policy target equal to the target Hitting the Overnight Rate Target -Operating Band – the target overnight rate plus or minus 0.25 percentage points. So the operating band is 0.5 percentage points wid
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