Monetary_Policy_Report_1995_Canada

Monetary_Policy_Report_1995_Canada - BANK OF CANADA...

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BANK OF CANADA Monetary Policy Report – May 1995 –
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Bank of Canada 234 Wellington Street Ottawa, Ontario K1A 0G9 893-49-90-514 CN ISSN 1201-8783 Printed in Canada on recycled paper This year is the sixtieth anniversary of the Bank of Canada, which commenced operations on 11 March 1935. To mark the occasion, our cover features Canada’s first silver dollar, struck in 1935 and featuring the evocative design of sculptor Emanuel Hahn.
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REPORT ON MONETARY POLICY Contents 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Inflation-Control Targets . . . . . . . . . . . . . . . . . . . 3 3. Recent Developments in Inflation . . . . . . . . . . . . 4 Inflation and the target band . . . . . . . . . . . . . . . . 5 Factors at work on inflation . . . . . . . . . . . . . . . . . 7 4. Achieving the Inflation-Control Targets . . . . . . . 13 5. The Outlook for Inflation . . . . . . . . . . . . . . . . . . 17 Aggregate demand and supply . . . . . . . . . . . . . . 17 Exchange rate effects . . . . . . . . . . . . . . . . . . . . . 18 Measures of inflation expectations . . . . . . . . . . . 18 Other indicators . . . . . . . . . . . . . . . . . . . . . . . . 18 6. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Appendix: The Benefits of Price Stability . . . . . . 21
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REPORT ON MONETARY POLICY 3 1. Introduction This is the first in a series of semi-annual reports by the Bank of Canada on Canadian monetary policy. The report reflects the framework used by the Bank in its conduct of policy. This framework includes: (i) a clear policy objective, (ii) a medium-term perspective (given the long lags for the full impact of mon- etary policy actions on the economy) and (iii) a recognition that monetary policy works through both interest rates and the exchange rate. The ultimate objective of Canadian monetary policy is to promote good overall economic performance. Monetary policy can contribute to this goal by preserving confidence in the value of money through price stability. In other words, price stability is a means to an end, not an end in itself. The benefits of stable prices – or the costs that inflation imposes on Canadians – are discussed in detail in an appendix to this report. Since 1991, the Bank has been committed to specific inflation-control targets along a path to price stability, and this commitment has begun to bear fruit. The decline of underlying inflation to rates between 1 1/2 and 2 per cent during the last three years has been a key factor behind Canada’s improved economic performance. The task ahead for monetary policy is to encourage sustained expansion at levels of activity that do not exceed the capacity of the economy to produce goods and services. This means that as the remaining slack in the economy is absorbed, the Bank must ensure that monetary conditions (i.e., the combined influ- ence of interest rates and the exchange rate on aggregate demand) are sufficiently tight to guard against a re-emergence of inflationary pressures. If spending levels were allowed to expand beyond the economy’s produc- tion capabilities, inflationary pressures would mount, and the prospects for steady and sustained expansion would be cut short.
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Monetary_Policy_Report_1995_Canada - BANK OF CANADA...

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