Current Actions of Bank of Canada to Fulfill its Mandate on Monetary Policy



Current Actions of Bank of Canada to Fulfill its Mandate on Monetary Policy

Introduction

Monetary policy refers to the number of government measures designed to affect financial markets and credit conditions, with the ultimate goal of influencing the national economy. In Canada, monetary policy is controlled by Bank of Canada, a Crown corporation that implements strategic decisions, largely due to its power to amend the Canadian money supply. Canadian economy was undergoing various financial challenges, and the global recession has worsened the case. This paper will discuss the current actions of Harper's government and will analyze whether the actions of Bank of Canada fulfill its mandate on monetary policy.

Bank of Canada and Monetary Policy

The Bank of Canada has no direct authority over the money supply, because the deposits are subject to decisions taken by the private banking system. However, this power to create money held by commercial banks is restricted by two factors. Initially, when the rate of interest from other financial assets is on the rise, Canadians are choosing to retain a relatively small part of their assets in cash, bank notes and bank deposits. Second, banks can not lend all the money entrusted to them, because they must maintain a certain reserve (mainly in the form of cash in their vaults or deposits with the Bank of Canada) to meet the demands withdrawal of their customers. On fluctuating interest rates and bank reserves, or both, the Bank of Canada can indirectly manipulate the money supply with high accuracy, especially over periods of three to six months or more.

Controlling the money supply is a powerful tool to influence the general behavior of the Canadian Economy. For example, a stimulating monetary policy (more money in the hands of people) causes a decrease in interest rates and stimulates business investment and the housing market, which affect the increasing demands. In times of cyclical downturn, which are characterized by high unemployment and stagnation of production, this increase in demand should, in principle, lead to increased production and employment levels. For cons, the slowdown in money growth slows economic growth, causing a rise in interest rates and reducing both the level of investment and total demand. In periods of high inflation, these factors contribute to reduce the price of consumer goods and pay increases.

Despite its considerable power, monetary policy also has limitations. It can, for example, both stimulate economic demand to reduce unemployment and limit the fight against inflation. The Bank of Canada cannot stimulate the growth rate of the dollar to reduce interest rates below the U.S. successfully while stabilizing the value of the exchange rate between U.S. dollar and Canadian dollar. Decisions concerning monetary policy require, therefore, often difficult choices and painful compromises.

Re-examining of Monetary Policy

The Bank of Canada, of course, like many other central banks, operates under an inflation-targeting regime. The bank continues to believe that this regime has served us exceptionally well, in both turbulent and tranquil ...