【正文】 ing band for ior in order to prevent inflationary pressures from building. (REINFORCED WITH SRAs) How the BofC Keeps inflation From Moving Above the Target Range [Fig 6] 31 3. Bank of Canada Lending – Lending of last resort – Advantages ? Prevent bank failures ? systemic risk – Disadvantages ? Moral Hazard – Sept 11,2021The response to the Sept. 11 terrorist attacks the G7’s group promised their central banks would deep liquidity flowing to financial markets. Similarly, the Fed injected more than US$100 billion, into the . banking system to keep it functioning through loans and open market operations at the fed funds rate. 4. Government Deposit Shifting (Cash Management) Used to neutralize or manipulate reserve or BS holdings of direct clearers through drawdown and redeposit of government deposits of direct clearers。 For example, if BofC wishes to decrease the clearing deposits (SB) of direct clearers, it moves government deposits from direct clearers from their own liabilities to increase the government deposits of BofC. The result is that the direct clearer decreases a liability (Government deposit) and decreases an asset (SB). 5. Swaps with the Exchange Fund Account Used to bring temporary changes in settlement balances on the accounts of FIs. The EFA can also be used by the BofC to prevent undesirable changes in the exchange rate. For example, given the current situation of strong Can$, a strategy that can be followed by the BofC (or Canadian firms and/or FI), is to buy US$. ? Depreciation of Can$ ? Increases in Canadian exports ? increase in economic growth. 32 Goals of Moary Policy ? High Employment ? Economic Growth ? Price Stability. “In 1923, a German housewife burned mark notes in her kitchen stove, since it was cheaper to burn marks than to use them to buy firewood” (A guide to understanding money amp。 investing, WSJ) – In 1923 you needed 726 million marks to buy the same than 1 mark in 1918. ? Interest Rate Stability ? Stability of Financial Markets (Changes in US moary policies may impact adversely other financial markets, ., Russian EuroBond Market 1998) ? Stability in Foreign Exchange Markets ? Conflict of goals Examples: – ↓ interest rate ? ↑ Economic growth ? ↑ inflation – Solution? ↑ interest rate ? ↓ inflation ↑ interest rate ? ↓ Economic growth ? ↑unemployment Usually the results of moary policy appear after 1 year or two 33 ?How the goals can be achieved? Tools ?Operating Targets ?Intermediate Targets ? Goals Market Operations Outright purchase and selling of government High Employment securities by the BofC Economic Growth 2. Target Overnight Interest rate Price Stability (., 2%) reinforced by Interest Rate Stability a) SPRAs (repo) Stability of Fin Markets b) SRAs (reverse repo) Stability in FX Markets 3. Lending to Direct Clearers 4. Government Deposit Shifting 5. Swaps with the Exchange Fund Account 34 Targets of moary policy a) Intermediate Targets b) Operating Targets or Instruments a) Intermediate Targets – Moary Aggregates: – M1 (currency + demand deposits) , – M2 (M1+ savings accounts), – M3 (M2 + short term deposits + foreign currency holdings by Canadian residents) – Interest rates: ST or LT. ? Affects the MS indirectly ?No very sensitive to BofC moary tools 35 b) Operating Targets or Instruments – Reserves aggregates or the moary base – Interest Rates (overnight interest rate or TBill rate) ? More sensitive to moary tools Criteria for choosing Operating Targets Both are measurable and controllable with precision pared to intermediate targets . The choice of the intermediate target is the goal for the operating target. ? To achieve main economic goals, aggregates or interest rates cannot be pursued at the same time (they are inpatible). Then, which target BofC should choose? What economic goals? Trend is to manipulate the overnight interest rates to achieve main goals of high level of employment and sustained economic growth. 36 Other slides (supplement) % (nominal desired goal) M1 = 3% MB = 2% ↓i*or to 2% MB = 3% M1=4% % (problem: ↑ inflation) Expected Possibility 37 Inflation Rate and Inflation Targets for Canada, 19802021 38 Conclusions ? Bank of Canada: Moary Policy ? Main objective: Price stability (low inflation) Mostly via changes in the overnight interest rate ? Goals of Moary Policy High employment, economic growth, price stability, interests rate stability, stability of financial markets and stability in foreign exchange markets. ? Directly achieved by Intermediate and Operating Targets ? BofC has been very successfully in controlling inflation mostly in the last 15 years