Bank of Canada (Based on Ch 6, Mishkin et al.)6.1 Central banks and their importance6.2 Functions of Bank of Canada6.3 Independence of Bank of Canada6.4 Structure of the Bank of Canada6.5 Other Central banks6.6 Conclusions16.1 Central BanksGovernment authorities in charge of the monetary policy (Management of interest rates and money supply)Importance of Central BanksvAmount of creditvMoney supplyvInterest ratesvLender of last resort An important reason for having a central bank is the need for a lender of last resort to prevent systemic financial crises. Banks are more prone to crises than other businesses because their assets are largely long-term, whereas their liabilities (deposits) can be withdrawn on demand. Effect in expected inflation rate, on foreign exchange rate, expected economic growth rate; in general, in the overall economy.vExample: The Bank of Canada decreased the target for the overnight interest rate from 2.75% to 2.5% (20Jan2004), then to 2.25% (March 2, 2004), and 2% on Apr13, 2004. It increased to 2.5% on May 13, 2005, 3.5% on Jan 24, 2006. Currently is 0.25% (May 7, 2009). Should bank of Canada leave interest rates alone? Do we need central banks? 2Reason why BofC sets a target overnight interest ratev“In choosing a Target for the Overnight Rate, the Bank of Canada picks a level that it feels will keep future inflation low, stable and predictable. Keeping inflation low and stable helps provide a good climate for sustainable economic growth, investment and job creation”Source: 36.2 Functions of the Bank of Canadav1. Bank Note Issuer Only provider of paper money v2. Government Debt and Asset Management Service Administration of government debt , such as the payment of interest and principal. Administration of foreign currency reserves Intervention in the FX marketsv3. Central Banking ServicesLender of last resort to prevent bank runs and panicsSupervises Canadas national payment system to prevent problems in the clearing and settlement system among FIs.Holder of deposit accounts of Fed. Govt., CPA, international organizations, other central banks4v4. Monetary Policy Managing of interest rates and money supply Main objective: Price stability (low inflation) Not an easy task:It involves to analyze incomplete and conflicting information of economic and financial indicators and make forecasts about uncertain future. For example: vCanadian dollar follows commodity price index which has steadily increased in last months. This will eventually increase inflation so that to avert it the Bank of Canada should increase the interest rate. vBut wait, the current level of interest rates is appreciating the Canadian dollar (against the US$) and it is decreasing the Canadian exports which eventually will have a negative impact in economic growth, employment, etc so BofC needs to decrease the interest ratevBut wait again, the interest rate of 2.0% is too low that in the long run inflation pressures will eventually appear 56.3 Independence of the Bank of CanadavJoint responsibility between the bank and the government (minister of finance) Bank Act of 1967vBank autonomy of actual day-to-day monetary policyvHowever, government is responsible of the policy (If required the government can make changes to monetary policy)66.4 Structure of the Bank of CanadaBoard of Directors: overall responsibility of operations of Bank of CanadaGovernor (CEO and chairman of the board), senior deputy governor (appointed for a 7-year term by the Board), deputy minister of finance, and 12 outside directors (appointed for a 3-year term by the Minister of Finance).Governing Council: responsible for the Banks new semi-annual Monetary Policy Report (May and November) and its Update (January and July).Members: Governor (chair), senior deputy governor and 4 deputy governors De fact responsible of the decision making of monetary policy Main objective: To determine monetary policy aimed at achieving and maintaining price stability.Decisions are influenced by market (and non market) participants76.5 Other Central BanksvEuropean Central BankvU.S. Federal Reserve SystemSets the reference in the world regarding monetary policyvSwiss National BankvBank of EnglandvBank of JapanvTrend Greater independence of Central Banksbetter monetary policy greater economic well-beingIt is supported by empirical evidence8Central Bank Independence and Macroeconomic Performance in 17 Countries96.6 ConclusionsvThe role of Bank of Canada is “to promote economic and financial well-being of Canada”vThis is mostly done through monetary policyvBofC is fairly independent* Greater independence of Central Banksbetter monetary policy greater economic well-being10