BankofCanada

(BasedonCh6,Mishkinetal.)6.1Centralbanksandtheirimportance6.2FunctionsofBankofCanada6.3IndependenceofBankofCanada6.4StructureoftheBankofCanada6.5OtherCentralbanks6.6Conclusions16.1CentralBanksGovernmentauthoritiesinchargeofthemonetarypolicy(Managementofinterestratesandmoneysupply)ImportanceofCentralBanksAmountofcreditMoneysupplyInterestratesLenderoflastresort[Animportantreasonforhavingacentralbankistheneedforalenderoflastresorttopreventsystemicfinancialcrises.Banksaremorepronetocrisesthanotherbusinessesbecausetheirassetsarelargelylong-term,whereastheirliabilities(deposits)canbewithdrawnondemand.] Effectinexpectedinflationrate,onforeignexchangerate,expectedeconomicgrowthrate;ingeneral,intheoveralleconomy.Example:TheBankofCanadadecreasedthetargetfortheovernightinterestratefrom2.75%to2.5%(20Jan2004),thento2.25%(March2,2004),and2%onApr13,2004.Itincreasedto2.5%onMay13,2005,3.5%onJan24,2006.Currentlyis0.25%(May7,2009).ShouldbankofCanadaleaveinterestratesalone?[Doweneedcentralbanks?]2ReasonwhyBofCsetsatargetovernightinterestrate“InchoosingaTargetfortheOvernightRate,theBankofCanadapicksalevelthatitfeelswillkeepfutureinflation

low,stableandpredictable. Keepinginflationlowandstablehelpsprovideagoodclimateforsustainableeconomicgrowth,investmentandjobcreation”

[Source:]34.MonetaryPolicy Managingofinterestratesandmoneysupply

Mainobjective:Pricestability(lowinflation)Notaneasytask: Itinvolvestoanalyzeincompleteandconflictinginformationofeconomicandfinancialindicatorsandmakeforecastsaboutuncertainfuture.Forexample:Canadiandollarfollowscommoditypriceindexwhichhassteadilyincreasedinlastmonths.ThiswilleventuallyincreaseinflationsothattoavertittheBankofCanadashouldincreasetheinterestrate.Butwait,thecurrentlevelofinterestratesisappreciatingtheCanadiandollar(againsttheUS$)anditisdecreasingtheCanadianexportswhicheventuallywillhaveanegativeimpactineconomicgrowth,employment,etc…soBofCneedstodecreasetheinterestrate…Butwaitagain,theinterestrateof2.0%istoolowthatinthelongruninflationpressureswilleventuallyappear…56.3IndependenceoftheBankofCanadaJointresponsibilitybetweenthebankandthegovernment(ministeroffinance)[BankActof1967]Bankautonomyofactualday-to-daymonetarypolicyHowever,governmentisresponsibleofthepolicy(Ifrequiredthegovernmentcanmakechangestomonetarypolicy)66.4StructureoftheBankofCanada

BoardofDirectors:overallresponsibilityofoperationsofBankofCanada

Governor(CEOandchairmanoftheboard),seniordeputygovernor(appointedfora7-yeartermbytheBoard),deputyministeroffinance,and12outsidedirectors(appointedfora3-yeartermbytheMinisterofFinance).

GoverningCouncil:responsiblefortheBank'snewsemi-annualMonetaryPolicyReport(MayandNovember)anditsUpdate(JanuaryandJuly). Members:Governor(chair),seniordeputygovernorand4deputygovernors

Defactresponsibleofthedecisionmakingofmonetarypolicy

Mainobjective:

Todetermine

monetarypolicyaimedatachievingandmaintainingpricestability.

Decisionsareinfluencedbymarket(andnonmarket)participants7CentralBankIndependenceandMacroeconomicPerformancein17Countries96.6ConclusionsTheroleofBankofCanadais“topromoteeconomicandfi