Chapter 22 Flashcards
Monetary policy
Process of regulating money supply and setting interest rates to influence economic conditions
Bank of Canada (4 things)
Central bank that promote the economic and financial welfare of Canada by using tools to calm fluctuations in the general levels of PRODUCTION, TRADE, PRICE and EMPLOYMENT M
BOC functions
Financial system stability, currency issuance, funds management
Potential output
“Perfect speed” where work and resources are used efficiently without overloading the system
Overnight rate
Interest rate BOC wants to see in the overnight lending market where commercial banks lend and borrow from each other
Influences all other interest rates, raising it cools inflation
Open market operations
BOC buys or sells government bonds in the open market to influence short term interest rates and liquidity
Buying bonds = more money (expansionary)
Selling bonds = less money (contractionary)
Five steps of monetary policy
- Economic model output
- Major briefing
- Policy recommendations
- Making the decision
- Communication
1/2 Economic projections and major briefing
Economists at the bank gather output from economic models and present to the governing council 2.5 weeks before interest rate decisions.
1.5 weeks later economist give major briefing to governing council
- Policy recommendations
Governing council and economics meet again couple days later to discuss final policy recommendations
Changing real interest rates
Raise = encourage less spending
Lower = stimulate greater spending
- Making the decision
After recommendations, governing council immediately meets to discuss before final decision
- Communication
Wednesday at 10am Ottawa times bank announces decision carefully
Bank’s mandate
Achieve inflation target of 2%, midpoint of 1% to 3% control range
Effect on employment rate
High = economic output below potential, inflation too low
Low = drive up costs = inflation
Keep low and stable to keep unemployment near lowest sustainable level
4 reasons to NOT target 0% inflation
- Inflation greases the wheels of the labour market
- Bank can owner real interest rates by not when inflation is above zero
- 0% inflation target runs risk of deflation
- Measuring inflation may be overstated
4 factors that shape the banks policy’s
- Neutral real interest rates
- Nominal interest rates
- Bank compares inflation with targeted inflation
- Output gap (gap btwn actual and potential output)
Policy rule of thumb
Overnight rate - inflation =
Neutral real interest rate + 1/2(inflation - 2%) + output gap
