Textbook Notes (369,204)
Canada (162,462)
York University (12,903)
Economics (1,011)
ECON 1010 (256)
Jean Adams (10)
Chapter 30

ECON 1010 - Textbook Notes - Chapter 30.docx

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ECON 1010
Jean Adams

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Chapter 30: Monetary Policy ECON 1010 Textbook Notes • Monetary policy objective: o Ultimately political stems from the mandate of the Bank (Bank of CanadaAct) o Bank of CanadaAct:  Describes mandate as: regulating credit and currency in the best interest of the nation, mitigate fluctuations in the general level of everything  Simple: Bank’s job is to control quantity of money and interest rates to avoid inflation and prevent, when possible, major swings in real GDP growth and unemployment o Inflation rate targeting:A monetary policy strategy in which the central bank commits to an explicit inflation target and explains how its actions will achieve that target o Interpretation of theAgreement:  Inflation-control target uses the CPI as a measure of inflation  Therefore the Bank’s targeted inflation is based on the CPI  Bank also pays attention to core inflation rate (based on eight volatile components) o Actual Inflation  Inflation fluctuates around the target inflation, usually staying within the target range o Rationale for an Inflation-Control Target  Two main benefits flow from adopting an inflation-control target: • Bank of Canada’s policy actions have a clearly stated purpose leading to a better understanding for members of the financial markets • Provides an anchor for expectations about future inflation o Controversy:  Critics say focusing on inflation lets unemployment and real GDP go unchecked  If Bank of Canada reigns inAD to prevent inflation from rising, exports suffer and the economy is put into a recession  Reply: • By keeping inflation low, the best use of monetary policy is made • Bank of Canada’s record is good, keeping within the target inflation without creating a recession • Responsibility for Monetary Policy: o Government of Canada and Bank of Canada agree on monetary policy target, but the Bank of Canada places responsibility for the conduct of monetary policy on the Bank’s government council o Governing Council:  Experts in monetary economics and monetary policymaking  Usually economics who previously worked in Bank’s policy/research departments o Economists:  Research economists who write papers on monetary policy  Provide governing council with extensive briefings o Consultations with government  Requires regular consultations with Minister of Finance  Minister gets to direct the Bank in event of a disagreement  Governor usually resigns in above situation • Conduct of Monetary Policy: o Monetary Policy Instrument  Bank can decide the quantity of money (monetary base), the price of money on the foreign exchange market and the opportunity cost of holding money (interest rate)  The Bank of Canada can usually set one of the variables but not all three  The above occurs because each of the variables is interlinked  Overnight rate • Choice of policy instrument is the overnight rate; short-term interest rate • Bank permits exchange rate and quantity of money to find their own equilibrium • Bank targets the interest rate on overnight loans (the loans that banks make to each other) • Eight fixed dates when a change is announced o Policy Decisions  To make the decision, Bank of Canada gathers a large amount of data about the way the economy will respond  All the data is processed to determine an ideal rate for the overnight loan market  After the rate is announced, Bank engages in public communication to explain the reasons for its decision  Bank also publishes a highly detailed inflation report o Policy implementation  The Bank of Canada uses operating band and open market operations to achieve its goal  Operating band: • Target overnight rate +- 0.25% • Bank creates operating band by setting two other interest rates o Bank rate: Interest rate that the bank of Canada charges banks on loans, overnigh
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