Evaluating Canada's Monetary Policy after Global Recession of 2008-2011

Evaluating Canada's Monetary Policy after Global Recession of 2008-2011

Introduction

Financial crises are scenarios where there is large scale default. This default is both on the part of the financial and non financial institutions. This state is usually accompanied by falling income and prices in the economy. This crisis is mostly caused due to the mismanagement in a certain country, but slowly and gradually it can spreads like wild fire into different countries. This spreading of financial crisis is due to the fact that most of the transaction in the world is interlinked and that world is a global village.

This report aims at elucidating the underlying concepts regarding the monetary policy. In addition, monetary policy of Canada will remain the focal point of our discussion.

Discussion

Monetary Policy Framework in Canada

Canada has maintained the interest rate at 0.5 percent for the consecutive 24th month. The main argument remains behind this decision is the economic recovery. The Canadian economy has emerged from the recession of 2008-09 with a strong public and private debt and high unemployment. The period of strong growth and macroeconomic stability that preceded the crisis had masked the accumulation of serious imbalances as a result of excessive reliance on debt financing and the financial sector, as well as soaring prices assets. It is essential to address these imbalances to ensure stable and sustainable recovery.

Bank of Canada has been continuously reducing its interest rate to hamper the conditions caused by the recession. If a country has applied Expansionary monetary policy it means that available money in commercial banks has increased. This can induce more loans. This actually reduces the interest rates which has a positive effect on credit demand. The credit-financed spending on consumer goods and capital goods will be increased, which increases in effect, production and employment. The flip side of an expansionary monetary policy of the National Bank is the rise in inflation, which in turn have negative effects on economy.

The BoC will continue to conduct monetary policy very accommodative. It maintains the quantitative easing started in 2009. As noted, a debate was initiated in late summer on whether to make more quantitative easing in the Canada but this level of inflation and GDP growth rates above potential have dismissed this debate. Early 2011, the increase in VAT in the Canada will participate in maintaining high inflation. Thus, the underlying inflation could spend several months over 3%. This poses obvious problems for the BoC. Inflation and growth have been consistently higher than the forecast of the central bank. The liquidity is flowing full with a quantitative easing, representing nearly 8% of GDP. . In short, the probability of an inflationary skid grows a little more each month. A monetary tightening from the spring of 2011 becomes necessary. The negative impact on the economy from the austerity plan does not seem sufficient to prevent an outbreak of the price-earnings (excluding bonuses currently wage inflation and unemployment rates ...