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28.4 Four Decades of Canadian Monetary Policy - Coggle Diagram
28.4 Four Decades of Canadian Monetary Policy
Economic Recovery: 1983-87
Economy:
1982 inflation = 12%; economy in recession (WAY further than targeted 2%)
Policy:
Bank had to figure out how to increase money supply to
accomodate
the recovery-induced increase in money demand
without
increasing the money supply so much that it refuelled inflationary pressures
Effect:
fairly successful → Bank allowed a short but rapid burst of growth in the nominal money supply, intended to accommodate the rise of money demand accompanying the recovery. It then reduced the growth rate of the money supply to a rate consistent with low inflation and the underlying growth in real income
Rising inflation: 1987-90
Economy
: starting to get out of hand – Y growing, U falling, P rising → this was going to lead to increased inflation where severe monetary restriction would need to be implemented!
Policy
: John Crow (BOC Governor) – announces that goal of BOC is LR price stability rather than SR stabilization – some criticism towards it being the right decision were present for example price stability being unobtainable or costs of reaching this would be too high; BOC runs "tight money" to fight "inflationary expectations"
Effect:
inflation still rises from 4 to 5%, and world recession occurred as well
Inflation Targeting: 1991-2000
Economy
: 1991 world recession; many argue to easy M-policy
Policy
: announcing Inflation Target in 1991; HOWEVER, cost of fighting inflation was a recession → leading to controversy i.e whether having lived a prolonged recession was necessary to target inflation or would low inflation rate be sustainable once recovery took economy back toward Y*
Effect
: Crow resigns (controversies); Gordon Thiessen is appointed BUT → he follows same tight monetary policy (how ironic) until 2001
Inflation Targeting: 2001-2007
Economy
: 2001 – 9/11 and War in Iraq → stock markets plungeing
Policy
: David Dodge (new Governor) → BOC must provide liquidity for recovery; China and India strong growth want to buy Canadian exports vs. increase in external value (domestic currency) of the Canadian $
Financial Crisis and Recession: 2007-2010
Economy
: US Housing Bubble – US homeowners "walking away" from their houses, whose market values had fallen below total amount owing on the associated mortgages – → financial institutions taking ownership of vacated houses → significant decline in value of houses assets → many financial institutions on verge of bankruptcy and insolvency (a state of financial distress in which a person or business is unable to pay their debts)→ credit freeze
Policy
: Mark Carney (new Governor)
Lowering ONR (overnight rate) to 1%
2.OMO (open market operations) and Forward Guidance; BOC eased terms with which it was prepared to make short-term loans to financial institutions → would restore flow of credit and reduce i-rates
Effect
: The "sovereign (gov.) debt crisis" (Europe) and US recession still plagued Canada
Slow Economic Recovery: 2011-Present
Economy
: Y near Y*, U low, inflation below target, BUT... Household debt still high, house prices high and growth was moderate
Policy
: Stephen Poloz (new Governor) conducting a conservative M-policy; ONR was kept low