Posts Tagged ‘Monetary Policy’
Saturday, January 28th, 2012
In particular, they argue that governments tend to expand the money supply too rapidly, and point to the various current account items shown, plus inflows of capital into Canada, including foreign direct investment into Canada, foreign purchases of Canadian stocks and bonds (including corporate bonds and bonds issued by governments), and foreign purchases of short-term Canadian securities (such as Treasury Bills) and bank deposits. Canada’s payments internationally are comprised of payments for the various current account items, plus outflows of capital from Canada, as Canadian businesses and citizens invest funds in other nations.
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Tags: Bank Deposits, Canada, Canadian Businesses, Canadian Securities, Canadian Stocks, Chichen Itza, Citizens, Corporate Bonds, Current Account, Foreign Direct Investment, Governments, Mexico, Monetary Policy, Money Supply, Puerto Morelos, Stocks And Bonds, Treasury Bills, Winnipeg Auto Dealers
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Tuesday, January 24th, 2012
Obviously, the conduct of monetary policy is extremely important to the nation’s economy. A properly conducted monetary policy can be very beneficial, whereas errors in monetary policy can have severe effects on the economy, either due to the creation of too much or too little money.
Who should make such important decisions? Some people believe that the financial experts at the Bank of Canada, who possess specialized knowledge of monetary matters, should have the responsibility and the power to decide the nation’s monetary policy. Other people disagree. They argue that such important policy decisions should not be made by the appointed officials at the Bank of Canada, but rather by the government, which was elected by (and is ultimately responsible to) the people.
The question of who possessed the final responsibility and authority for monetary policy remained somewhat vague until 1960, when matters came to a head in the celebrated “Coyne affair.” James Coyne, governor of the Bank of Canada, was pursuing a tight-money policy at the same time as the federal government was trying to stimulate the economy with budget deficits. When Coyne refused to alter the Bank of Canada’s policies, the government in effect dismissed him by introducing legislation declaring his position vacant. By this act, the government established itself as the final authority in the area of monetary policy. This was given legislative authority in amendments to the Bank of Canada Act in 1967, which stated that in the event of disagreement between the government and the Bank of Canada, the government can direct the central bank in writing as to the monetary policy to be followed.
Supporters of the government’s authority over the Bank of Canada argue that, without this authority, the government cannot ensure that the Bank of Canada’s monetary policy is consistent with the federal government’s fiscal policies, and point to the Coyne affair as evidence on their behalf. Critics of the government’s authority over monetary policy have little faith in the economic judgement of politicians.
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Tags: Amendments, Bank Of Canada, Budget Deficits, Canada Act, Canada Government, Coyne, Disagreement, Economy, Federal Government, Financial Experts, Fiscal Policies, Important Decisions, Important Policy, Legislation, Legislative Authority, Monetary Matters, Monetary Policy, Money Policy, Policy Decisions, Tight Money
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Thursday, August 4th, 2011
During a period of “easy money,” when the banks have plentiful reserves and are ready to make numerous new loans, interest rates tend to fall, to encourage borrowers to borrow additional funds. Thus, “easy money” tends to involve two characteristics – increased availability of loans and lower interest rates – both of which tend to stimulate borrowing and spending by consumers and businesses.
During a period of “tight money,” the scarcity of loans causes interest rates to rise, so that the available loans tend to go better credit risks and the highest bidders among them. These two characteristics of “tight money” – reduced availability of loans and higher interest rates – both tend to depress borrowing and spending by consumers and businesses.
Thus, monetary policy can influence the money supply through either the supply of loans or the demand for them. By increasing or reducing the banks’ reserves, the Bank of Canada can influence the availability (or supply) of loans, and by altering interest rates, the Bank of Canada operates in both ways, influencing both the availability and the cost of credit.
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Tags: Bank Of Canada, Banks, Bidders, Borrowers, Consumers, Easy Money, Funds Money, Honda, Hot Water Heaters, Interest Rates, Loans, Monetary Policy, Money Rates, Money Supply, Odyssey, Scarcity, Tight Money, Waverley, Winnipeg
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Monday, August 1st, 2011
“Moral suasion” refers to attempts by the Bank of Canada to persuade the managements of the chartered banks to voluntarily cooperate with the central bank’s objectives regarding lending policies, interest rates or any other aspect of monetary policy. Due to the fact that there are so few banks in Canada,it is relatively simple for the Bank of Canada to discuss its objectives with the banks with a view to enlisting their support, which they are expected to provide.
In summary, the Bank of Canada influences the nation’s money supply through various policy approaches including “open-market operations”, changes in the secondary reserve ratio, changes in the Bank Rate and “moral suasion.” By using these policy measures, the Bank of Canada can generate “easy money”, in which lending by the banks and the money supply expand more rapidly, or “tight money”, in which loans are scarce and the money supply rises slowly or even declines.
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Tags: Attempts, Bank Of Canada, Banks In Canada, Chartered Banks, Declines, Easy Money, Honda, Honda Cr V, Honda Model, Interest Rates, Loans, Monetary Policy, Money Supply, Moral Suasion, Open Market Operations, Reserve Ratio, Tight Money, Winnipeg
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Thursday, July 28th, 2011
The “floating” Bank Rate was set each week at one-quarter of one percentage point above the rate of interest on Treasury Bills. Thus, if the rate of interest on Treasury Bills was 11.25 percent, the Bank Rate for that week would be 11.50 percent. As a result, the Bank Rate would change each week, depending on changes in short-term interest rates in general and in the interest rate on Treasury Bills in particular.
This does not mean, however, that the Bank Rate merely follows short-term interest rates and has lost its significance as a signal regarding the Bank of Canada’s monetary policy. The Bank of Canada is still in a position to influence the interest rate on Treasury Bills and thus the Bank Rate, and the weekly movements of the Bank Rate and the Bank of Canada’s efforts to influence it are regarded as significant by economists and financial observers. Since many interest rates are based on the Bank Rate, changes in the Bank Rate are usually forerunners of changes in interest rates on loans to consumers and businesses.
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Tags: Bank Canada, Bank Of Canada, Bank Rate, Consumers, Economists, Forerunners, Honda, Honda Accord, Honda Cr V, Interest Rate, Interest Rates, Loans, Monetary Policy, Observers, Percentage Point, Rate Changes, Rate Of Interest, Term Interest, Treasury Bills, Winnipeg
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Sunday, July 17th, 2011
We have seen that, in its capacity as “a bank for banks,” the Bank of Canada can make loans to chartered banks suffering a temporary shortage of cash reserves. The rate of interest paid by the banks for these loans is known as the “Bank Rate.” In theory, a higher Bank Rate would make the banks keep more excess cash reserves in order to avoid the need to borrow from the Bank of Canada, and would thus restrict the banks’ ability to make loans and increase the money supply. In fact, this is not of any real significance, since the chartered banks only very rarely borrow from the Bank of Canada.
Rather, the importance of the Bank Rate to monetary policy has arisen from the use of Bank Rate changes by the Bank of Canada as signals to the nation of the direction of the central bank’s policies. An announcement of an increase in the Bank Rate is a signal of “tighter money,” with loans less available and more costly, whereas an announcement by the central bank of a reduction in the Bank is interpreted as signalling a movement yet the underlying economics of the situation are often quite different. If, for example, consumer demand for lumber is very high, lumber stores will find their inventories depleting rapidly and will be anxious to replenish their stocks of lumber. With the purchases for all the various lumber stores bidding actively against each other for a limited supply of lumber from the sawmills, the price will be bid up.
When the lumber reaches the retail stores, it will have a higher price – which store managers describe as “an increase in our costs.” However, the real origin of the price increases lies in high consumer demand; it is really demand-pull in nature rather than cost-push, as it appears.
In a similar way, people tend to blame inflation generally on what they can see – increases in union wages and business profits. Yet these wage and profit increases are more the symptoms of inflation, the basic cause being excess demand. Early in a period of inflation caused by excess demand, prices tend to rise faster than wages, many of which are tied to union contracts that have not yet expired; as a result, profits increase rapidly (the catch-up phase), people blame unions for the inflation. In both cases, attention is focused not on the basic cause of inflation, but rather on the more visible symptoms.
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Tags: Bank Of Canada, Banks Canada, Business Profits, Cash Reserves, Chartered Banks, Excess Cash, Excess Demand, Limited Supply, Lumber Price, Lumber Retail, Lumber Stores, Monetary Policy, Money Supply, Price Increases, Profit Increases, Rate Changes, Rate Of Interest, Sawmills, Store Managers, Union Wages
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