Monetary Policy

Monetary policy can be defined as the actions of a Country’s monetary authority to control money supply and interest rates with the end goal of effecting economic growth and stability. The broader goals being targeted inflation and low unemployment. There are two types of policy, expansionary and contractionary. Expansionary policy increases the total supply of money faster than usual and contractionary policy decreases the total supply of money slower than customary. The controller and effector of Monetary Policy in Canada is the central bank, the Bank of Canada.   It manages the supply of money by stipulating how much will be printed. It acts as the Banks’ Bank clearing cheques and adjusting bank balances accordingly while providing overnight loans to the Banks to cover any account shortfalls. This loan rate is referred to as the Bank Rate and effectively dictates real interest rates.  It acts as the Government’s Banker holding deposits and financing the government debt by issuing Bonds and Treasury Bills. The sales and purchase of these by the Bank of Canada directly effects the money supply. Sales decrease money supply and purchases by the BoC increase money supply.  It supervises the operation of financial markets to ensure stability and specifically oversees the activity of the Chartered Banks. Current Monetary Policy in Canada has an expansionary stance – a healthy supply of money and low interest rates. This is the same stance as in the US, however one of the things that differed in the US and may have contributed to the US housing bubble and collapse is referred to as Asymmetric monetary policy or the “Fear of Depression”. Monetary policy requires contraction when the economy is over-stimulated and it can be argued that the US Federal Reserve under Greenspan, did not take this action when required creating unsustainable growth.