class 10 Flashcards
what is the bank of Canadas main policy instrument?
setting the target for the policy rate
what is the goal of the bank of Canadas monetary policy?
to keep inflation within the range of 1%-3% with the midpoint being at 2%
what was the first country to adapt an inflation target rate?
new Zealand
what is a policy instrument?
changes in the policy rate that influence other interest rates and the exchange rate
what determines the monetary conditions that the canadian economy operates in?
the level of short-term interest rates and the exchange rate of the canadian dollar
how long are changes in monetary conditions felt?
they are felt over a period of several months to years
how does the bank of canada keep inflation from moving above the target range?
an increase in target for the overnight rate causes the dollar value and interest rates to go up, causing a decrease in aggregate demand and dollars, causing the rate of inflation to fall
how does the bank of Canada keep inflation from moving below the target rate?
a decrease in target for the overnight interest rate leads to the dollar value and interest rates going down, causing an increase in aggregate demand and dollars, causing the inflation rate to rise
what is the overnight interbank market?
the interbank market for funds with a maturity of 1 day
what is the overnight interest rate?
the interest rate at which participants (banks) borrow and lend overnight funds to each other in the overnight market
what is the policy rate?
the rate that the bank sets to keep the overnight rate within a band of 50 basis points (0.5%) with the midpoint being the target
what is the top of the operating band?
the bank rate
what is the bank rate?
the rate at which the bank of Canada will lend to banks
what is the bottom of the operating band?
the deposit rate
what is the deposit rate?
the rate at which banks can earn interest on excess reserves when they deposit it at the bank of canada
how does the top of the operating band and the bottom of the operating band keep the overnight rate in-between the operating band?
because the top being the bank rate, is higher than any other commercial bank could offer to another bank if a commercial bank tries to get a loan from another bank, and the deposit rate being the floor because no bank could offer the interest rate that the Bank of canada does if another bank would want to deposit their money at another bank
what is the operating band?
the objective to keep the overnight rate within a band of 50 basis points (0.5%)
what were 2 exceptions for the operating band?
during the 07 financial crisis, the band was 25 basis points (0.25%)
curing the covid-19 pandemic this happened again
what are the 2 conventional monetary policy tools?
the bank of Canada standing liquidity facilities
open market operations
what is the bank of canada standing liquidity facilitates?
the bank of canada stand ready with liquidity facilitates to lend or borrow from a lynx participant (bank) at the end of the banking day
who decides to initiate the bank of Canadas standing liquidity facilities?
it is on the lynx participant (the bank) may use the banks lending ti obtain overnight liquidity in case of a shortage or may use the deposit facilities to make deposits incase of excess liquidity
if the overnight rate increases toward the upper limit of the operating band, what will the bank of canada do?
they bank will lend at the bank rate, putting a ceiling on the the overnight rate and causing the other banks to lend at a Lower rate and pushing the overnight rate back to the midpoint
if the overnight rate falls towards the lower limit of the operating band, what will the bank of canada do?
the bank will accept deposits from lynx participants (banks) at the bank rate minus 50 basis points, putting a floor on the overnight rate, this causes other banks to increase their overnight rate
what determines the overnight rate?
the market for settlement balances (reserves) and the supply and demand in the market for reserves