Bank Of Canada Case Study

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The Bank of Canada is the Canada’s central bank. It was established in 1935. The governor of the Bank is appointed by the federal government. The current governor is Stephen S. Poloz.

The Bank of Canada pursues inflation targets laid down by the government but makes its own decisions on how best to achieve those goals.

Monetary policy is a set of decisions a government makes, through its central bank, about the amount of money in circulation in economy. In Canada, monetary policy is conducted by adjusting short-term interest rates to achieve a rate of monetary expansion consistent with maintaining a low, predictable and relatively stable rate of inflation.

Monetary policy in Canada has three
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The Bank’s policy decision to change the target overnight interest rate has direct effect on the gradual change in the amount of money circulating in the economy. This is only one instrument for monetary policy.

The Consumer Price Index

The Consumer Price Index (CPI) provides a broad measure of cost of living. While there are also other ways to measure price changes, CPI is the most important indicator for its widespread use, for example, it is used to calculate changes in government payments like the Canada Pension Plan and Old Age Security.

Through the CPI, Statistics Canada tracks the retail price of a representative sample of shopping basket of about 600 goods and services from an average household’s expenditure on food, clothing, transportation, furniture, housing and recreation on a monthly basis.

Prices are measured against a base year of 2002 and the basket for that year 2002 is given the value of
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The Bank also monitors a set of core inflation measures, which strips out eight most volatile CPI components. This core measures allow the Bank to monitor temporary changes in total CPI inflation by focusing on the underlying trend in inflation. In this sense, core inflation is regularly monitored as an operational guide to help the Bank achieve the total CPI inflation target.

The other most important element of Canada’s monetary policy framework is flexible exchange rate. A floating Canadian dollar allows Bank to pursue an independent monetary policy that is best suited to Canada’s economic circumstances and have its focus on achieving the inflation target. Movements in the exchange rate also provide a buffer, which helping our economy to absorb and simultaneously adjust to external and internal shocks.

When the Bank of Canada has clearly stated objectives and takes monetary policy actions that affirm those objectives, this result in an increase in its credibility. This credibility helps to keep expectations of future inflation close to the target―what is also called an anchoring of inflation

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