To keep inflation low, stable and predictable, to moderate the business cycle, and help the economy achieve full employment and sustained growth.

By altering the money supply to influence interest rates

Inflation target range of 1-3% annually

©2013 McGraw-Hill Ryerson Ltd. 1Chapter 13.3

Reserve Bank of Australia (RBA)

Bank of Canada

European Central Bank (ECB)

Bank of Japan (BOJ)

Banco de Mexico (Mex Bank)

Central Bank of Russia

Sveriges Riksbank

Bank of England

Federal Reserve System (the

“Fed”)

(12 Regional Federal Reserve

Banks)

Australia:

Canada:

Euro Zone:

Japan:

Mexico:

Russia

Sweden:

United

Kingdom:

United States:

Selected Nations

©2013 McGraw-Hill Ryerson Ltd. 2Chapter 13.3

The Objective of the Bank of Canada’s Monetary Policy

Tools of Monetary Policy: Open-Market Operations Bank Rate

©2013 McGraw-Hill Ryerson Ltd. 3Chapter 13.3

Bank of Canada BUYS bonds from the chartered banks Chartered bank gives up bonds Bank of Canada pays chartered

bank by increasing chartered bank’s reserves

©2013 McGraw-Hill Ryerson Ltd. 4Chapter 13.3

Assets Liabilities and Net Worth

Bank of Canada

+ Securities + Reserves of Chartered Banks

(b) Reserves

Chartered Banks

-Securities (a)

+Reserves (b)

Assets Liabilities and Net Worth

LO2

(a) Securities

16-5©2013 McGraw-Hill Ryerson Ltd. 5Chapter 13.3

Bank of Canada BUYS bonds from the public Public gives up bonds for cheque Cheque is deposited in chartered

bank Chartered bank’s reserves increase

©2013 McGraw-Hill Ryerson Ltd. 6Chapter 13.3

Bank of Canada buys $1,000 bond from a chartered bank.

New Reserves

$5000Bank System Lending

Total Increase in the Money Supply, ($5,000)

$1000ExcessReserves

©2013 McGraw-Hill Ryerson Ltd. 7Chapter 13.3

Bank of Canada buys $1,000 bond from the public.

New Reserves$1000

Total Increase in the Money Supply, ($5000)

$200DesiredReserves

$800ExcessReserves

$1000InitialCheckableDeposit

$4000Bank System Lending

©2013 McGraw-Hill Ryerson Ltd. 8Chapter 13.3

Bank of Canada BUYS bonds Chartered bank’s reserves increase Banks increase lending Money supply increases

Bank of Canada SELLS bonds Chartered bank’s reserves decrease Banks decrease lending Money supply decreases

©2013 McGraw-Hill Ryerson Ltd. 9Chapter 13.3

Assets Liabilities and Net Worth

Bank of Canada

- Securities - Reserves of Chartered Banks

Chartered Banks

+ Securities (a)- Reserves (b)

Assets Liabilities and Net Worth

(a) Securities

(b) Reserves

LO2 16-10©2013 McGraw-Hill Ryerson Ltd. 10Chapter 13.3

Bank of Canada SELLS bonds to the public Public pays bonds with cheque Cheque is cleared in chartered bank Chartered bank’s reserves decrease

The Bank of Canada bond sales of $1000 to the chartered banking system reduce the system’s actual and excess reserves by $1000.

But a $1000 bond sale to the public reduces excess reserves by $800

©2013 McGraw-Hill Ryerson Ltd. 11Chapter 13.3

The bank rate is the interest rate the Bank of Canada charges on the loans to the chartered banks

Bank rate is set at the upper end of the Bank of Canada’s operating band for the overnight lending rate

Bank has a publicized target for the overnight lending rate

©2013 McGraw-Hill Ryerson Ltd. 12Chapter 13.3