This paper applies a static model of an interest rate corridor to the Canadian data, and estimates the aggregate demand for central-bank settlement balances in the Large Value Transfer System (LVTS).
Topics: Interest rates; Monetary policy implementation; Payment clearing and settlement systemsThe Bank of Canada’s annual conference, held in November 2011, brought together leading researchers from universities, central banks and other institutions from around the world. Divided into four sessions plus two keynote addresses, the conference covered such topics as the use of cash and other means of payment in retail transactions, large-value payments systems, and over-the-counter markets and central counterparties.
Topics: Bank notes; Central bank research; Financial system regulation and policies; Monetary policy implementation; Payment clearing and settlement systemsThis paper uses Latent Semantic Analysis to extract information from Bank of Canada communication statements and investigates what type of information affects returns and volatility in short-term as well as long-term interest rate markets over the 2002-2008 period.
Topics: Financial markets; Monetary policy implementationWe present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral.
Topics: Central bank research; Financial services; Financial system regulation and policies; Monetary policy implementation; Payment clearing and settlement systemsThe author evaluates the effect of the Bank of Canada's conditional commitment regarding the target overnight rate on longer-term market interest rates by taking into account the relationship between interest rates, inflation, and unemployment rates.
Topics: Interest rates; Monetary policy implementation; Transmission of monetary policyInflation-targeting central banks around the world often state their inflation objectives with regard to the consumer price index (CPI). Yet the literature on optimal monetary policy based on models with nominal rigidities and more than one sector suggests that CPI inflation is not always the best choice from a social welfare perspective.
Topics: Inflation and prices; Inflation targets; Inflation: costs and benefits; Monetary policy framework; Monetary policy implementationThis article explores the role of inflation expectations in the conduct of monetary policy. It reviews the various measures of inflation expectations used by central banks, including surveys and market-based indicators, and considers their advantages and disadvantages. It examines the critical role of inflation expectations in the framework that central banks use to understand, forecast, and control inflation. It also looks at their role as an indicator of central bank credibility. The behaviour of inflation expectations over the past two years is analyzed and policy conclusions are offered.
Topics: Inflation targets; Monetary policy implementationUsing the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period.
Topics: Monetary policy framework; Monetary policy implementationAlthough the concept of monetary policy lag has historical roots deep in the monetary economics literature, relatively little attention has been paid to the idea. In this paper, we build on Svensson's (1997) inflation targeting framework by explicitly taking into account the lagged effect of monetary policy and characterize the optimal monetary policy reaction function both in the absence and in the presence of the zero lower bound on the nominal interest rate.
Topics: Inflation targets; Monetary policy framework; Monetary policy implementationThe authors present a detailed discussion of the Bank of Canada's framework for the implementation of monetary policy. As background, they provide a brief overview of the financial system in Canada, including a discussion of the financial services industry and the money market.
Topics: Financial Institutions; Financial markets; Monetary policy implementation; Payment clearing and settlement systemsOne of the most important factors that must be considered if countries are thinking about lowering the target level of inflation much below 2 per cent is the zero interest bound. Targeting inflation rates that are too low, the authors note, may restrict the ability of monetary policy to respond to economic shocks by limiting the amount by which interest rates can be eased. The size of the shocks hitting an economy, the formation of inflation expectations, and the conduct of monetary policy are also seen to exert an important influence on the risks of hitting the zero interest bound. The evidence that the authors review suggests that the probability of encountering the zero bound when the average inflation is at least 2 per cent are relatively small.
Topics: Inflation: costs and benefits; Interest rates; Monetary policy implementationSince 1997 when the Bank of Canada last published a review of the Canadian overnight market, several important changes have affected the market's structure and dynamics. Reid provides a current overview of the market, examining the financial instruments, market transparency and flows, and the collateralized overnight rate as it has evolved since the introduction of the Large Value Transfer System and the fixed announcement dates. Other significant influences include changes in market practices regarding risk management, the rise of securities lending, the increased demand for collateral, and the Bank of Canada's measures to reinforce the target for the overnight rate.
Topics: Market structure and pricing; Monetary policy framework; Monetary policy implementationThis paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of U.S. monetary policy and in the implied central-bank target for inflation. Empirical results support a description of policy with an effective inflation target of roughly 7 percent in the 1970s.
Topics: Central bank research; Monetary aggregates; Monetary policy implementationOperational events in the Large Value Transfer System (LVTS) almost always result in a disturbance of the regular flow of payments.
Topics: Monetary policy implementation; Payment clearing and settlement systemsIn the United States, the Federal Reserve has a dual mandate of promoting stable inflation and maximum employment. Since the Fed directly controls only one instrument—the federal funds rate—the authors argue that the Fed's priorities continuously alternate between inflation and economic activity.
Topics: Econometric and statistical methods; Monetary policy framework; Monetary policy implementationWhen the Bank of Canada was first established in 1935, it had two very different models to choose from—the Bank of England and the U.S. Federal Reserve—in terms of the instruments that it might use for implementing monetary policy. Although some aspects of the Bank's early monetary policy practices, including the role of discount facilities and moral suasion, reflect the British example, other important differences shaped a distinctly Canadian approach. Chant describes what he argues are distinctively Canadian innovations: the Bank's favoured means of managing chartered bank liquidity through transfers of government deposits, the adoption of lagged reserve requirements, and the two periods in which it decided to float the Bank Rate. He also describes the series of bold initiatives that were undertaken in the 1990s with regard to simplifying clearing and settlement procedures, reducing reserve requirements, and setting the Bank's target for the overnight rate. Chant suggests that these changes have improved market efficiency, reduced risk and uncertainty, and strengthened the Bank's influence over its short-term operating target.
Topics: Monetary policy implementationThe author provides an overview of the 1975–78 Anti-Inflation Program (AIP), in a background document prepared for a seminar organized by the Bank of Canada to mark the AIP's 30th anniversary.
Topics: Credibility; Fiscal Policy; Inflation and prices; Inflation targets; Monetary policy framework; Monetary policy implementationThe author provides a non-technical explanation of the role played by the exchange rate in Canada's inflation-targeting monetary policy.
Topics: Exchange rates; Inflation targets; Monetary policy implementationAn essential element of the Bank of Canada's inflation-targeting framework is a floating exchange rate that is free to adjust in response to shocks that affect the Canadian and world economies. This floating rate plays an important role in the transmission mechanism for monetary policy. A practical question is how the Bank of Canada incorporates currency movements into the monetary policy decision-making process. Only after determining the cause and persistence of exchange rate change, and its likely net effect on aggregate demand, can the Bank decide on the appropriate policy response to keep inflation low, stable, and predictable. Ragan reviews the need to target inflation and the transmission mechanism for monetary policy, including the role of the exchange rate, before describing two types of exchange rate movements and their implications for monetary policy.
Topics: Exchange rates; Inflation targets; Monetary policy implementationWhen it launched a new system for regularly announcing its decisions regarding the overnight rate of interest in December 2000, the Bank of Canada had a number of key objectives in mind. These included reduced uncertainty in financial markets, greater focus on the Canadian rather than the U.S. economic environment, more emphasis on the medium-term perspective of monetary policy, and increased transparency regarding the Bank's interest rate decisions.
Evidence to date suggests that all four objectives have been met to a substantial degree. Fixed announcement dates have provided regular opportunities for the Bank to communicate its views on the state of the Canadian economy to the public. This has helped to improve understanding of the broad direction of monetary policy and of the rationale behind the Bank's policy decisions although the decisions themselves are not always fully anticipated.
Topics: Credibility; Financial markets; Interest rates; Monetary policy implementation; Uncertainty and monetary policyThe authors evaluate whether an assortment of simple rules could improve how the Bank of Canada implements its inflation-targeting monetary policy. They focus on measuring the correlation between the deviations of inflation from the target and the lagged deviations of rule recommendations from the actual policy interest rate.
Topics: Inflation targets; Monetary policy implementationThis paper shows that if the Bank of Canada is optimally adjusting its monetary policy instrument in response to inflation indicators to target 2 per cent inflation at a two-year horizon, then deviations of inflation from 2 per cent represent the Bank's forecast errors, and should be uncorrelated with its information set, which includes two-year lagged values of the instrument and the indicators. Positive or negative correlations are evidence of systematic errors in monetary policy.
Topics: Inflation targets; Monetary and financial indicators; Monetary policy implementationThis article outlines one of the Bank's key approaches to dealing with the uncertainty that surrounds decisions on monetary policy: the consideration of a wide range of information from a variety of sources. More specifically, it describes the information and analysis that the monetary policy decision-makers—the Governing Council of the Bank of Canada—receive in the two or three weeks leading up to a decision on the setting of the policy rate—the target overnight interest rate. The article also describes how the Governing Council reaches this decision.
Topics: Monetary and financial indicators; Monetary policy framework; Monetary policy implementationIt is commonly observed that central banks respond gradually to economic shocks, moving the interest rate in small discrete steps in the same direction over an extended period of time. This paper examines the empirical evidence regarding central banks' smoothing of interest rates, paying particular attention to the case of Canada.
Topics: Monetary policy implementationIn this study we statistically quantify the reactions of Canadian and U.S. interest rates to macroeconomic announcements released in Canada and in the United States. We find that Canadian interest rates react very little to Canadian macroeconomic news and are significantly affected by U.S. macroeconomic news, which indicates that international influences on the Canadian fixed-income markets are important.
Topics: Financial markets; Interest rates; Monetary policy implementation
