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.

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Policy Rules for Capital Controls

Staff working paper 2017-42 Gurnain Pasricha
This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the mercantilist and macroprudential motivations for capital control policies.

Government Spending Multipliers Under the Zero Lower Bound: Evidence from Japan

Staff working paper 2017-40 Thuy Lan Nguyen, Dmitriy Sergeyev, Wataru Miyamoto
Using a rich data set on government spending forecasts in Japan, we provide new evidence on the effects of unexpected changes in government spending when the nominal interest rate is near the zero lower bound (ZLB).

What’s Up with Unit Non-Response in the Bank of Canada’s Business Outlook Survey? The Effect of Staff Tenure

Staff discussion paper 2017-11 Sarah Miller, David Amirault, Laurent Martin
Since 1997, the Bank of Canada’s regional offices have been conducting the Business Outlook Survey (BOS), a quarterly survey of business conditions. Survey responses are gathered through face-to-face, confidential consultations with a sample of private sector firms representative of the various sectors, firm sizes and regions across Canada.

A Dynamic Factor Model for Commodity Prices

Staff analytical note 2017-12 Doga Bilgin, Reinhard Ellwanger
In this note, we present the Commodities Factor Model (CFM), a dynamic factor model for a large cross-section of energy and non-energy commodity prices. The model decomposes price changes in commodities into a common “global” component, a “block” component confined to subgroups of economically related commodities and an idiosyncratic price shock component.

Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada

Staff working paper 2017-39 Julien Champagne, Rodrigo Sekkel
We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada's staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada.
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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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