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CIA4U0 Analyzing Current Economic Issues

CIA4U0 Analyzing Current Economic Issues. Chapter 12: Monetary Policy Topic 3: The Tools of Monetary Policy P 274-176. The Tools of Monetary Policy Introduction. Introduction The Overnight Rate Target The Bank’s Balance Sheet. The Tools of Monetary Policy Introduction.

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CIA4U0 Analyzing Current Economic Issues

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  1. CIA4U0Analyzing Current Economic Issues Chapter 12: Monetary Policy Topic 3: The Tools of Monetary Policy P 274-176

  2. The Tools of Monetary PolicyIntroduction • Introduction • The Overnight Rate Target • The Bank’s Balance Sheet

  3. The Tools of Monetary PolicyIntroduction • Bank of Canada’s Primary goal: price stability (low inflation- 1% to 3% range) • Up until 1991, fairly high, 5.9% • Since then it has never been higher than 3% • Near 1% the Bank decreases interest rates, near 3% it increases interest rates

  4. The Tools of Monetary PolicyThe Overnight Rate Target • Bank of Canada is the primary lender to all FI’s • FI’s often also borrow from each other • BoC publishes the rate/range at which they will lend (overnight rate target) • Then, all other FI’s lend/borrow within that range, never more, because everyone knows they can get a better deal at the BoC

  5. The Tools of Monetary PolicyThe Overnight Rate Target • When the BoC changes the rate target, it is signaling the industry how it wants them to change their interest rates • If the BoC charges more, the banks charge more; if less then less • Chain reaction-inflation is inversely related to interest rates-rates go up, inflation goes down and vice versa • http://www.bankofcanada.ca/en/monetary_mod/below/index.html

  6. The Tools of Monetary PolicyThe Bank’s Balance Sheet Holdings of gold and foreign currencies (mostly USD) that are used to buy up CAD when the value of our dollar drops. Money lent to Canada’s Financial Institutions (like an account receivable) All bank notes issued by the Bank of Canada. Represents value owed to the holder (gold coins?) FI reserves and savings for debt payment. Interest is paid on these and they are like an Account Payable The BOC is the “banker” to the government. This is the Government’s “chequing account”. A bond is a form of loan. This is one way that the government finances itself when it runs a deficit. • Assets: • Government of Canada Bonds • Foreign Exchange • Advances (loans) to the Chartered Banks • Liabilities: • Currency Outstanding • Deposits of the Chartered Banks • Deposits of the Federal Government

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