E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
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Targeting Inflation from Below - How Do Inflation Expectations Behave?
Inflation targeting (IT) had originally been introduced as a device to bring inflation down and stabilize it at low levels. Given the current environment of persistently weak inflation in many advanced economies, IT central banks must now bring inflation up to target. -
The Effect of the Federal Reserve’s Tapering Announcements on Emerging Markets
The Federal Reserve’s quantitative easing (QE) program has been accompanied by a flow of funds into emerging-market economies (EMEs) in search of higher returns. -
November 13, 2014
Recent Developments in Experimental Macroeconomics
This article describes experimental economics, in general, and new developments in experimental macroeconomics, in particular. The approach has a clear niche in providing evidence on economic phenomena that cannot be observed directly or that are difficult to measure. Experimental work conducted by Bank of Canada economists has shed light on a number of issues important to monetary policy, such as the relative efficacy between price-level and inflation targeting, and the nature of inflation expectations formation. -
November 13, 2014
Should Forward Guidance Be Backward-Looking?
When constrained by the zero lower bound, some central banks have communicated a threshold that must be met before short-term interest rates would be permitted to rise. Simulation results for Canada show that forward guidance that is conditional on achieving a price-level threshold can theoretically raise demand and inflation expectations by significantly more than unemployment thresholds. This superior performance is attributable to the fact that the price-level threshold depends on past inflation outcomes. In practice, however, history-dependent thresholds such as this might be more challenging for central banks to communicate. -
November 13, 2014
Spillover Effects of Quantitative Easing on Emerging-Market Economies
While quantitative easing (QE) in the United States likely increased capital flows to emerging-market economies (EMEs), putting upward pressure on asset prices and exchange rates, diverging fundamentals between advanced economies and EMEs were also important drivers. Evidence suggests that the benefits of QE to EMEs, in higher global demand and increased confidence, appear to outweigh the costs. When advanced economies begin to normalize monetary policy, the best defence for EMEs against any potential instability is likely to be further strengthening of their macroeconomic and financial policy frameworks. -
On the Importance of Sales for Aggregate Price Flexibility
Macroeconomists have traditionally ignored the behavior of temporary price markdowns (“sales”) by retailers. Although sales are common in the micro price data, they are assumed to be unrelated to macroeconomic phenomena and generally filtered out. -
Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective
This paper discusses how central banking is evolving in light of recent experience, with particular emphasis on the incorporation of uncertainty into policy decision-making. -
International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada
The U.S. Federal Reserve responded to the great recession by reducing policy rates to the effective lower bound. In order to provide further monetary stimulus, they subsequently conducted large-scale asset purchases, quadrupling their balance sheet in the process. -
The Neutral Rate of Interest in Canada
A measure of the neutral policy interest rate can be used to gauge the stance of monetary policy. We define the neutral rate as the real policy rate consistent with output at its potential level and inflation equal to target after the effects of all cyclical shocks have dissipated.