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Chapter 28: Monetary Policy in Canada - Coggle Diagram
Chapter 28: Monetary Policy in Canada
Money supply vs. the interest rate
these two are the two alternative approaches for implementing its monetary policy
monetary policy can be implemented either by targeting the money supply or by targeting the interest rate. But for a given M(demand) curve, both cannot be targeted independently
disadvantages of conducting monetary policy by targeting the money supply
the BOC cannot control the process of deposit creation
there is uncertainty regarding the slope of the Md curve
there is uncertainty regarding the position of the Md curve
advantages of conducting monetary policy by targeting the Interest rate
the BOC is
able
to control a particular interest rate
uncertainty about the slope and position of the Md curve does not prevent the BOC from establishing its desired intrest rate
the BOC can easiy communicate its interest-rate policy to the public
overnight interest rate
the interest rate that commercial banks charge one another for overnight loans
the target overnight interest rate
When the BOC changes its target for the overnight rate, the change in the actual overnight rate happens almost instantly.
the bank rate
the interest rate that BOC charges commercial banks for loans
endogenous money supply
money supply = bank deposits + currency in circulation. the amount of bank deposits is not directly controlled by the BOC, but instead is determined by the economic decisions of households, firms, and commercial banks
open-market operations
the purchase or sale of government securities on the open market by the central bank
inflation targeting
Because high and uncertain inflation reduces real incomes for many households and also hampers the ability of the price system both to allocate resources efficiently and to produce satisfactory rates of economic growth
To keep the rate of inflation close to the 2 percent target, the BOC closely monitors real GDP in the short run and designs its policy to keep real GDP close to potential output
Inflation targets are not as "automatic" a stabilizer as the fiscal stabilizers built into the tax-and-transfer system. However, as long as the central bank is committed to achieving its inflation target, its policy adjustments will act to stabilize real GDP
CPI inflation vs. core inflation
the exchange rate and monetary policy
When the government or Federal Reserve uses monetary or fiscal policy to expand the economy, this increases our income and our demand for imports, and ultimately lowers the exchange rate. Contractionary policies have the opposite effect.
lags in the effect of monetary policy
experience has shown that lags in the operation of policy can sometimes cause stabilization policy to be destabilizing
Monetary policy is capable of exerting expansionary and contractionary forces on the economy, but it operates with a time lag that is long and difficult to predict