ch28 - Monetary Policy Monetary Policy Objective and...

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Chapter 28 Monetary Policy Monetary Policy Objective and Framework The objective of monetary policy is given in the preamble to the Bank of Canada Act of 1935: to regulate credit and currency in the best interests of the economic life of the nation … and to mitigate by its influence fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action … The Bank’s main emphasis is to avoid inflation. In a joint statement, the government of Canada and the Bank of Canada have agreed that o The inflation control target range will be 1 to 3 percent a year. o Policy will aim at keeping the trend of inflation at the 2 percent target midpoint. o The agreement will run for five years and be reviewed before the end of 2006. It is the CPI inflation rate that the Bank has agreed to keep on a 2 percent target trend But the Bank also pays close attention to core inflation , which is the CPI excluding the eight most volatile prices—the prices of fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco— and also excluding changes in indirect taxes—taxes such as GST, HST, and provincial sales taxes. Critics argue that by focusing on inflation, the Bank of Canada sometimes permits the unemployment rate or real GDP growth to suffer. But the last time the Bank created a recession was at the beginning of the 1990s. Since that time, monetary policy has been sensitive to the state of employment while maintaining its focus on achieving its inflation target. The Conduct of Monetary Policy The Bank can decide to control the quantity of money, the price of Canadian money on the foreign exchange market, or the opportunity cost of holding money (the short-term interest rate). The specific interest rate that the Bank targets is the overnights loans rate.
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ch28 - Monetary Policy Monetary Policy Objective and...

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