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Essay on The Monetary and Fiscal Policy of Canada
Monetary policy
Monetary policy is concerned with how much money circulates in the economy and what that money is worth. By keeping inflation low, stable and predictable, the Bank of Canada contributes to solid economic performance and rising living standards for Canadians and allows them to make spending and investment decisions with more confidence. This encourages longer-term investment in Canada's economy, and contributes to sustained job creation and greater productivity. This in turn leads to real improvements in our standard of living. Canada’s monetary policy is built on two components:
Flexible Exchange Rate: Canada's flexible exchange rate permits us to pursue an independent monetary policy suited to the needs of our own economy and acts as a "shock absorber."
Inflation-Control target: The target provides a precise goal against which to measure the conduct of monetary policy, increasing the Bank's public accountability. (John Murray, July 1999, p.40)
The Bank of Canada conducts monetary policy with the aim of harnessing the many benefits of keeping inflation low and stable and thereby maintaining a more favorable climate for long-lasting economic growth and job creation. The Bank carries out monetary policy by influencing short-term interest rates. It does this by raising and lowering the "target for the overnight rate." The overnight rate is the interest rate at which major financial institutions borrow and lend one-day funds among themselves; the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Bank's key policy rate. Changes in the key policy rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar. (June 25, 1999)
Fiscal Policy
Fiscal policy is the use of government taxing and spending powers to affect the behavior of the economy.
