13.3 Goals of Monetary Policy

1. 13.3 Goals of Monetary Policy • To keep inflation low, stable and predictable, to moderate the business cycle, and help the economy achieve full employment and sustained growth. • By altering the money supply to influence interest rates • Inflation target range of 1-3% annually Chapter 13.3

2. Global Perspective 13.1:Central Banks Selected Nations Australia: Canada: Euro Zone: Japan: Mexico: Russia Sweden: United Kingdom: United States: Reserve Bank of Australia (RBA) Bank of Canada European Central Bank (ECB) Bank of Japan (BOJ) Banco de Mexico (Mex Bank) Central Bank of Russia Sveriges Riksbank Bank of England Federal Reserve System (the “Fed”) (12 Regional Federal Reserve Banks) Chapter 13.3

3. Goals and Tools of Monetary Policy • The Objective of the Bank of Canada’s Monetary Policy • Tools of Monetary Policy: • Open-Market Operations • Bank Rate Chapter 13.3

4. Open-Market Operations • Bank of Canada BUYS bonds from the chartered banks • Chartered bank gives up bonds • Bank of Canada pays chartered bank by increasing chartered bank’s reserves Chapter 13.3

5. Assets Liabilities and Net Worth Bank of Canada Buys Bonds from Chartered Banks Bank of Canada + Securities + Reserves of Chartered Banks (b) Reserves (a) Securities Chartered Banks Assets Liabilities and Net Worth • Securities (a) +Reserves (b) Chapter 13.3 16-5 LO2

6. Open Market Operations • Bank of Canada BUYS bonds from the public • Public gives up bonds for cheque • Cheque is deposited in chartered bank • Chartered bank’s reserves increase Chapter 13.3

7. Figure 13-2The Bank of Canada’s Purchase of Bonds and the Expansion of the Money Supply Bank of Canada buys $1,000 bond from a chartered bank. New Reserves $1000 Excess Reserves $5000 Bank System Lending Total Increase in the Money Supply, ($5,000) Chapter 13.3

8. Figure 13-2The Bank of Canada’s Purchase of Bonds and the Expansion of the Money Supply Bank of Canada buys $1,000 bond from the public. New Reserves $1000 $200 Desired Reserves $800 Excess Reserves $1000 Initial Checkable Deposit $4000 Bank System Lending Total Increase in the Money Supply, ($5000) Chapter 13.3

9. Open-Market Operations Bank of Canada BUYS bonds • Chartered bank’s reserves increase • Banks increase lending • Money supply increases Bank of Canada SELLS bonds • Chartered bank’s reserves decrease • Banks decrease lending • Money supply decreases Chapter 13.3

10. Assets Liabilities and Net Worth Bank of Canada Buys Bonds from Chartered Banks Bank of Canada - Securities - Reserves of Chartered Banks (a) Securities (b) Reserves Chartered Banks Assets Liabilities and Net Worth + Securities (a) - Reserves (b) Chapter 13.3 16-10 LO2

11. Open Market Operations • Bank of Canada SELLS bonds to the public • Public pays bonds with cheque • Cheque is cleared in chartered bank • Chartered bank’s reserves decrease • The Bank of Canada bond sales of $1000 to the chartered banking system reduce the system’s actual and excess reserves by $1000. • But a $1000 bond sale to the public reduces excess reserves by $800 Chapter 13.3

12. The Bank Rate and the Overnight Lending Rate • The bank rate is the interest rate the Bank of Canada charges on the loans to the chartered banks • Bank rate is set at the upper end of the Bank of Canada’s operating band for the overnight lending rate • Bank has a publicized target for the overnight lending rate Chapter 13.3