VIEWS: 1 PAGES: 28 POSTED ON: 4/22/2012
The Bank of Canada (The Bank) The Bank of Canada is Canada’s central bank. A central bank is a public authority that supervises financial institutions and markets and conducts monetary policy http://www.bankofcanada.ca/ Bank of Canada: History Created by the Bank of Canada Act of 1935 Was privately own until 1938. That is: The shares were sold to the public; The dividends were limited up to 4.5%, the rest – to the govt. A Governor of the Bank is appointed by the govt of Canada for 7 year term Currently: David Dodge Monetary Policy Monetary policy is the attempt to control inflation and moderate the business cycle by changing the quantity of money in circulation the interest rates the exchange rate. Responsibility for Monetary Policy Independent central bank Canada until 1967, USA, Germany, Switzerland Subordinate central bank Canada since 1967 (Amendment to the Bank of Canada Act after the clash between Governor James Coyne and Prime Minister John Diefenbaker in 1961) Independent Central Bank An independent central bank is one that determines the nation’s monetary policy without interference from govt. Argument: Independent Bank is able to pursue the long-term goal of price stability and can prevent monetary policy from being used for short-term, political advantage. Subordinate Central Bank The govt (the minister of Finance has final responsibility for monetary policy. http://www.fin.gc.ca/ Argument: monetary policy is so important that it should be subject to democratic control. The governor is powerful – as long as he/she is willing to implement gov’t policies. Dual Responsibility The Bank formulates and carries out monetary policy The Minister of Finance can issue a directive to the Bank if the govt disapproves the bank’s policy. The governor can not refuse to resign. The Functions of the Bank of Canada To conduct monetary policy To act as lender of last resort To issue the country’s bank notes To act as a financial adviser and a fiscal agent to the federal govt: beresponsible for the govt of Canada debt management To regulate payment and settlement system The Monetary Base The liabilities of the Bank of Canada are the largest component of the monetary base. The monetary base (MB) is the sum of the Bank of Canada notes outside the Bank, chartered banks’ deposits at the Bank of Canada, and coins held by HHs, firms, and banks. 3 components of monetary policy monetary policy objectives monetary policy indicators monetary policy tools Monetary Policy Objectives “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…” Bank of Canada Act, 1935 Current objective: keep the inflation rate between 1% and 3% a year and smooth fluctuations as much as possible. Monetary Policy Indicators Monetary policy indicators are the current features of the economy that the Bank closely watches. The best ones are those that are accurately and frequently observable are good predictors of real GDP growth, employment, and inflation can control quickly by the Bank The Overnight Loans Rate The overnight loans rate is the interest rate on large-scale loans that chartered banks make to each other and to dealers in financial markets. It’s the main policy indicator. Overnight rate Monetary Policy Tools Four policy tools impact on bank reserves and the quantity of money (M): Required reserve ratio (RRR) Bank rate and bankers’ deposit rate Open market operations Government deposit shifting RRR: before 1992 The banks were required to hold a fixed proportion of deposits in reserves - in the form of currency and deposits at the Bank of Canada - to ensure they are able to meet the demands of their customers. - until 1967 – 8%, then less and less… By changing RRR, the Bank of Canada changes the amount of lending the banks can do. RRR After 1992 Required reserves act like a tax on the banks. The opportunity cost of reserves = forgone interest. RRR was abolished in 1992. Now, banks in Canada have not been required to hold reserves: RRR = 0. This action has made the banks in Canada more profitable. The Bank Rate The Bank of Canada stands ready to lend reserves to banks to ensure that they can always meet their depositors’ demands for currency the banks can manage with small reserves The bank rate is the interest rate that the Bank charges the chartered banks on the reserves it lends them. Bankers’ Deposit Rate The bankers’ deposit rate is the interest rate that the Bank pays the chartered banks on the deposits at the Bank. It is 0.5% less than the bank rate. The Bank can always make the overnight loans rate hit its target range by its setting of the bank rate and the bankers’ deposit rate. The Bank of Canada’s Official Rate The Bank of Canada’s official rate (or key policy rate) is the Target for the Overnight Rate, which is the midpoint of the Bank’s Operating Band for overnight financing. The official rate was formerly the Bank Rate, which is the upper limit of the operating band. Announcements regarding the official rate are made on eight fixed, or pre-specified, dates each year. Open Market (OM) Operations An open market operation is the purchase or sale of govt of Canada securities — Treasury bills and govt bonds — by the Bank of Canada from or to a chartered bank or the public. OM operations are the main method of controlling bank reserves and the money supply. Govt Deposit Shifting Govt deposit shifting is the transfer of govt funds by the Bank from the govt’s account at the Bank to or from its accounts at the chartered banks. It’s fine-tuning the bank reserves. The volume is about 250 times less than the volume for the OM operations. Controlling the Money Supply When the Bank of Canada buys securities in an OM operation => => the monetary base => banks’ lending => the quantity of money Monetary Base and Bank Reserves MB => bank reserves and currency held by HHs and firms . Only the increase in bank reserves can be used by banks to make loans => create additional money. Money Multiplier The money multiplier is the amount by which the quantity of money changes from a change in the monetary base. Compare it to the deposit multiplier: the deposit multiplier shows how a change in bank reserves changes bank deposits. M Money multiplier . MB A Currency Drain A currency drain makes the money multiplier smaller. A currency drain occurs when people hold currency rather than deposit the currency in banks. It reduces the amount of banks’ reserves and decreasing the amount that banks can loan. Interest Rate Fluctuations The first effect of monetary policy is a change in all interest rates. It occurs quickly and relatively predictably. - The Bank targets directly the overnight loans rate (OLR). - The short-term rates (3-month Treasury bill, short-term corporate debt) follow OLR. - 10-year govt bond rates move in the same direction, but fluctuates less. Money Supply Target Vs. Interest Rate Target The Bank can not keep fixed both the quantity of money and the interest rate because the demand for money fluctuates. Thus, the choice: A. Money supply target: to keep the quantity of money stable, let the interest rate fluctuate. B. Interest rate target: to keep the interest rate stable, let the quantity of money fluctuate. The Bank chooses to keep interest rate stable (B). To raise the interest rate the Bank decreases the average quantity of money by decreasing bank reserves.
Pages to are hidden for
"Basics The"Please download to view full document