Monetary policy

Our commitment is to keep inflation low, stable and predictable. To do this, we must understand what causes inflation and ensure our tools and framework remain fit for purpose in a world with more frequent supply disruptions.

In recent years, Canada has faced high inflation and used exceptional monetary policy tools, such as quantitative easing, to restore price stability. Looking back on this period offers a valuable opportunity to understand the underlying drivers of inflation and evaluate the effectiveness of these monetary policy tools.

The future of the economic environment remains uncertain, and structural challenges are making both the global and Canadian economies more susceptible to supply disruptions. That makes it important to gain a comprehensive understanding of how these challenges affect production, employment, inflation dynamics and the transmission of monetary policy.

Studying these issues will help monetary policy adapt to changes in the economy and maintain price stability. We are looking at issues in several areas, including:

  • the pricing strategies that firms use, including during supply shocks
  • the best approaches for setting monetary policy in periods of high uncertainty
  • the impact of monetary policy on the supply and demand of housing
  • the effectiveness of various monetary policy tools used during the COVID-19 pandemic
  • the ability of flexible inflation-targeting to maintain price stability when the economy is unpredictable

Inflation dynamics

Our research on inflation dynamics aims to further our understanding of the factors behind inflation, particularly since the end of the COVID-19 pandemic. To do so, we are using new data sources, innovative research methods and advanced economic models. For example, we are using novel business- and product-level data to explore how businesses pass on costs to consumers. Similarly, consumer-level data help us understand how households adjust their spending and expectations as inflation rises and falls.

Transmission and conduct of monetary policy

Canada is entering a period of rapid economic transformation. In this context, we need to understand how monetary policy affects different households and businesses and how it works its way through the economy. We must also find the best way to set monetary policy and manage risks—responding to trade-offs between stabilizing growth and controlling inflation—particularly if Canada faces more frequent supply shocks.

Monetary policy tools and implementation

The economic effects of the COVID-19 pandemic prompted the Bank to use extraordinary tools, such as quantitative easing. The use of these tools has had a significant impact on the size and structure of the Bank’s balance sheet. Our research focuses on the impact and effectiveness of these tools and on how the Bank can effectively influence market interest rates with an expanded balance sheet.

Monetary policy framework

Jointly with the Government of Canada, the Bank reviews its monetary policy framework every five years to keep pace with changes in the economic environment. Since the COVID-19 pandemic, more frequent shocks and unprecedented challenges have increased volatility, generated persistent imbalances in the housing market and reduced the reliability of our key measures of underlying inflation. Our research will help future reviews of our framework to ensure that monetary policy remains effective in promoting the economic and financial well-being of Canadians.

Related research

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Money Talks: How Foreign and Domestic Monetary Policy Communications Move Financial Markets

Staff working paper 2025-33 Rodrigo Sekkel, Henry Stern, Xu Zhang
We construct a dataset on Federal Reserve and Bank of Canada non-rate announcement events to provide novel insights into how foreign and domestic monetary policy communications affect the financial markets of open economies. We find that Fed non-rate communications have a stronger impact on long-term interest rates and stock futures, while Bank of Canada communications are relatively more important for short-term interest rates and the exchange rate.
Content Type(s): Staff research, Staff working papers JEL Code(s): E, E5, E52, F, F3, F31, G, G1, G15 Research Theme(s): Financial markets and funds management, Market functioning, Monetary policy, Monetary policy tools and implementation, Structural challenges, International trade, finance and competitiveness

Uncovering Subjective Models from Survey Expectations

Staff working paper 2025-31 Chenyu Hou, Tao Wang
This paper shows that survey expectations can be used to uncover how households subjectively think about inflation and unemployment dynamics jointly. The commonly documented "stagflation view", namely the households' tendency to associate inflation with a worse labor market, implies amplified impacts of supply shocks and dampened ones of demand shocks.
Content Type(s): Staff research, Staff working papers JEL Code(s): D, D8, D84, E, E2, E21, E3, E30, E32, E7, E71 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Economic models, Monetary policy, Inflation dynamics and pressures, Real economy and forecasting

Non-homothetic Preferences and the Demand Channel of Inflation

Staff working paper 2025-30 Stephen Murchison
An alternative to the standard CES aggregator, based on non-homothetic household preferences, is proposed. Specifically, the elasticity of substitution between goods declines during periods of strong per-capita consumption and vice versa, giving firms an incentive to adjust their desired markup in response to the state of demand. Empirical evidence favouring a direct role for per-capita consumption demand in inflation determination for Canada is presented.
Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, E27, E5, E52, Q, Q4, Q43, Q5, Q58 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures

Risk Scenarios and Macroeconomic Forecasts

Staff working paper 2025-28 Kevin Moran, Dalibor Stevanovic, Stéphane Surprenant
We produce forecasts for four risk scenarios to consider their usefulness for monitoring the Canadian economy. We find a high-oil-price scenario benefits the economy, a US recession induces a slowdown, a tight labor market leads to price increases, and a restrictive monetary policy scenario increases the unemployment rate while lowering the inflation rate.
Content Type(s): Staff research, Staff working papers JEL Code(s): E, E3, E32, F, F4, F41, F44 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Economic models, Monetary policy, Real economy and forecasting

High-Frequency Cross-Sectional Identification of Military News Shocks

Staff working paper 2025-27 Francesco Amodeo, Edoardo Briganti
We identify and quantify fiscal news shocks, compiling events (2001–2023) that altered the expected path of U.S. defense expenditure. For each event, we estimate market-implied shifts in expected spending. A shift-share analysis yields a two-year, metropolitan statistical area–level GDP multiplier of approximately 1 for U.S. military build-ups.
Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, E20, E3, E30, E32, E6, E60, E62, E65 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Economic models, Monetary policy, Monetary policy framework and transmission, Real economy and forecasting
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Disclaimer

Bank of Canada staff produce research and analysis to support the work of the Bank and to advance knowledge in the fields of economics and finance. The research is non-partisan and evidence based. All research is produced independently from the Bank’s Governing Council. The views expressed in each paper or article are solely those of the authors and may differ from official Bank of Canada views.

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