Boc also buys and selling things in the foreign

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BoC also buys and selling things in the foreign exchange market ii. Open-market operations: buying and selling government bonds 1. The BoC controls/influences the money supply by: - Bank of Canada's tools of monetary control Lecture Notes Page 22
Sterilization: the process of offsetting foreign exchange market operations with open-market operations so that the effect on the money supply is cancelled out Remember: cheque-clearing happens at the end of everyday. What happens when a bank doesn’t have enough funds to cover all the cheques that were drawn out of its account that day? BoC pays commercial banks the bank rate, minus half a percent on their deposits at BoC Sets pattern for all short-term interests in Canada triangle45right Range between is known as the operating band Bank, or discount, rate: interest rate that the BoC charges commercial banks to borrow overnight rhombus5 Stays very close to middle of the operating band Overnight rate: interest rate that commercial banks charge each other to borrow and lend overnight rhombus5 Two rates are linked and both move in the same direction (i.e. if bank rate increases, overnight rate increases). rhombus5 If bank rate is high, borrowing is expensive for banks, meaning that the reserves are lower -> let less loans out-> money supply decreases. rhombus5 If the bank rate is low, banks can afford to borrow more, giving them more reserves -> more loans out -> money supply increases. rhombus5 BoC has fixed eight days each year on which it announces how it will influence bank rate rhombus5 They can either borrow money from other commercial banks or from the BoC. Changing the overnight rate: the government can change the bank rate, which equally changes the overnight rate 2. there is no MRR in Canada, yet there is in US Not used in Canada square4 If the Board of Governors of the Federal Reserve System (US’s central bank) increase MRR, then a higher fraction of deposit has to be kept back in reserve and money supply would decrease. square4 If MRR was lower, less money held in reserves, more in loans and money supply increases square4 Changing the minimum reserve requirement 3. Money supply falls even without any action of BoC If people lose confidence and withdraw deposits and hold more currency, banking system loses reserves and creates less money square4 Increased money in deposit, increased reserves, increased money that bank can create, increased money supply and conversely as well - BoC does not control the amount of money that households choose to hold as deposits in bank 1. Hold greater reserves, decide to make fewer loans, money supply falls Bank can choose simply to hold extra money as reserves square4 Once money is deposited in a bank, it creates more money only when the bank loans it out - BoC does not control the amount that commercial bankers choose to lend 2. Remember: BoC is a lender of last resort. - If everyone shows up at the bank to take money out, the bank may not have enough and could end up bankrupt square4

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