Bài giảng Macro - Chapter 14 The Bank of Canada and Monetary Policy

The Bank of CanadaandMonetary PolicyChapter 14SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGEIn this chapter you will learnThe main functions of the Bank of CanadaHow the Bank of Canada can expand or contract the money supplyThe components of money demandHow the equilibrium interest rate is determined in the money marketThe mechanism by which the interest rate affects GDPChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Goals of Monetary Policyto help the economy to attain a full-employment, noninflationary level of total outputby altering the economy’s money supply and interest rateshow does this work?Goals of Monetary PolicyIncrease the money supply during a recession to stimulate spendingDecrease the money supply during inflation to constrain spendingChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Functions of the Bank of Canada1. The “Bankers’ Bank”2. Issuing Currency3. Acting As Fiscal Agent4. Supervising the Chartered Banks5. Regulating the Supply of MoneyBank of Canada Independencecontroversialvoters hold Parliament responsibleBank must be protected from political pressuresChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Balance Sheet OfThe Bank Of CanadaASSETSLIABILITIES ANDNET WORTHTreasury bills of CanadaOther government securitiesForeign currency depositsOther assetsTable 14-1ASSETSLIABILITIES ANDNET WORTHTreasury bills of CanadaOther government securitiesForeign currency depositsOther assetsNotes in circulationGov’t of Canada depositsChartered bank depositsOther depositsOther liabilitiesBalance Sheet OfThe Bank Of CanadaTable 14-1ASSETSLIABILITIES ANDNET WORTHTreasury bills of CanadaOther government securities Foreign currency depositsOther assetsNotes in circulationGov’t of Canada depositsChartered bank deposits Other depositsOther liabilitiesThese deposits necessary for cheque clearingBalance Sheet OfThe Bank Of CanadaTable 14-1ASSETSLIABILITIES ANDNET WORTHTreasury bills of CanadaOther government securitiesForeign currency depositsOther assetsNotes in circulationGov’t of Canada depositsChartered bank depositsOther depositsOther liabilitiesThese deposits are part of the banks’ RESERVESBalance Sheet OfThe Bank Of CanadaTable 14-1Chapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Tools of Monetary PolicyTwo main instruments:Open-Market OperationsGovernment Deposit ShiftingOpen-Market OperationsBank of Canada’s buying bonds from & selling them to chartered banks & the general publicOpen-Market OperationsBank of Canada BUYS bondsFrom the chartered banksChartered bank gives up bondsBank of Canada pays chartered bankChartered bank’s reserves increaseOpen Market Operations ExampleBank Of Canada BUYS $1,000 Of Securities From the Chartered BanksBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilitiesOpen Market Operations ExampleBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities - Securities Bank Of Canada BUYS $1,000 Of Securities From the Chartered BanksOpen Market Operations ExampleBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities - Securities + Charteredbankdeposits + Reserves Bank Of Canada BUYS $1,000 Of Securities From the Chartered BanksBank Of Canada BUYS $1,000 Of Securities From the Chartered BanksOpen Market Operations ExampleBank Of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities - Securities + Charteredbankdeposits + Reserves Deposits of the charteredbanks at the Bank of Canadaare part of each bank’sreservesOpen Market Operations ExampleBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities - Securities + Charteredbankdeposits + Reserves Bank Of Canada BUYS $1,000 Of Securities From the Chartered BanksAssume R = 20%Find the maximum increasein the money supply forthe chartered bank systemD=E X m= $1000 X 1/.20=$1000 X 5New reserves$1000Excessreserves$5,000Chartered bank system lendingTotal increase in money supply ($5,000)Bank Of Canada Bond PurchasePurchase of a$1000 bondfrom acharteredbank....Figure 14-1Open-Market OperationsBank of Canada BUYS bondsFrom the chartered banksChartered bank gives up bondsBank of Canada pays chartered bankChartered bank’s reserves increaseFrom the publicPublic gives up bonds for chequeCheque is deposited in chartered bankChartered bank’s reserves increaseOpen Market Operations ExampleBank of Canada BUYS $1,000 Of Securities From the PublicBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilitiesOpen Market Operations ExampleBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities +DepositsBank of Canada BUYS $1,000 Of Securities From the PublicOpen Market Operations ExampleBank of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities + Charteredbankdeposits + Reserves +Depositssome reserves must be kept on hand against this depositBank of Canada BUYS $1,000 Of Securities From the PublicOpen Market Operations ExampleBank Of CanadaAssetsLiabilitiesChartered BanksAssetsLiabilities+ Securities + Charteredbankdeposits + Reserves +DepositsBank of Canada BUYS $1,000 Of Securities From the PublicAssume R = 20%Find the maximum increasein the money supply forthe chartered bank systemD=E X m= $800 X 1/.20=$800 X 5Total increase in money supply ($5,000)Bank Of Canada Bond PurchasePurchase of a$1000 bondfrom thepublic....$4000Chartered bank system lending$1000InitialdepositFigure 14-1$200DesiredreservesNew reserves$800ExcessreservesOpen-Market OperationsBank of Canada BUYS bondsChartered bank’s reserves increaseBanks increase lendingMoney supply increasesBank of Canada SELLS bondsChartered bank’s reserves decreaseBanks decrease lendingMoney supply decreasesSwitching Government of Canada DepositsBank of Canada is the federal government’s bankSwitching deposits FROM the chartered banks to the Bank of Canada reduces deposits & reservesSwitching deposits TO the chartered banks from the Bank of Canada increases deposits & reservesmain method by which the Bank of Canada controls the money supplyThe Bank Rate & the Overnight Loans RateBank rate is the interest rate the Bank of Canada charges on the loans to the chartered banksBank rate is set at half a percentage point above the overnight loans rateBank of Canada has a published target for the overnight loans rateChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”The Demand for MoneyTransactions Demand, Dtdemand for money as a medium of exchangevaries directly with GDPAsset Demand, Dademand for money as a store of valuevaries inversely with the interest rateThe Demand For MoneyTransactionsDemand, Dt+Interest RateAmount of moneydemanded (billionsof dollars)Dt 107.5 52.5 00 50 100 150 200 250 300 i%Figure 14-2TransactionsDemand, DtAssetDemand, Da+=Amount of moneydemanded (billionsof dollars) 107.5 52.5 0Da0 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)Dt 107.5 52.5 00 50 100 150 200 250 300 i%i%Interest RateThe Demand For MoneyFigure 14-2TransactionsDemand, DtAssetDemand, DaTotal demandfor money, Dm+= 107.5 52.5 0Amount of moneydemanded (billionsof dollars) 107.5 52.5 0Da0 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)Dt 107.5 52.5 00 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)0 50 100 150 200 250 300 Dmi%i%i%100 + 100 = 200Interest RateThe Demand For MoneyFigure 14-2TransactionsDemand, DtAssetDemand, DaTotal demandfor money, Dm+= 107.5 52.5 0Amount of moneydemanded (billionsof dollars) 107.5 52.5 0Da0 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)Dt 107.5 52.5 00 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)0 50 100 150 200 250 300 Dmi%i%i%ADD THEMONEY SUPPLYTO FIND THEEQUILIBRIUM RATEOF INTERESTInterest RateThe Demand For MoneyFigure 14-2TransactionsDemand, DtAssetDemand, DaTotal demandfor money, Dm+= 107.5 52.5 0Amount of moneydemanded (billionsof dollars) 107.5 52.5 0Da0 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)Dt 107.5 52.5 00 50 100 150 200 250 300 Amount of moneydemanded (billionsof dollars)0 50 100 150 200 250 300 Dmi%i%i%SmieEquilibriumInterest RateInterest RateThe Demand For MoneyFigure 14-2Chapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”The Money MarketA decline in the supply of money will create a temporary shortage of money & increase the equilibrium interest rateThe Money MarketRate of interest, i (percent)Amount of money demanded(billions of dollars) 107.5 52.5 0SmDmieSuppose the moneysupply is decreasedfrom $200 billion, Sm,to $150 billion Sm10 50 100 150 200 250 300 Figure 14-3Amount of money demanded(billions of dollars)0 50 100 150 200 250 300 107.5 52.5 0DmieSmA temporary shortageof money will requirethe sale of some assetsto meet the needSm1Rate of interest, i (percent)The Money MarketFigure 14-3Amount of money demanded(billions of dollars)0 50 100 150 200 250 300 107.5 52.5 0DmieSmA temporary shortageof money will requirethe sale of some assetsto meet the needSm1Rate of interest, i (percent)The Money MarketFigure 14-3Everyone sells bonds bond prices fall interest rates riseillustratedBondsa $1,000 bond @ 5% pays $50 annuallyif you buy this bond for $667, you still receive $50 annuallywhat is your effective interest rate?50/667=7.5%the lower the bond price,the higher the interest rateBondsa $1,000 bond @ 5% pays $50 annuallyif you buy this bond for $667, you still receive $50 annuallywhat is your effective interest rate?50/667=7.5%what if you pay $2,000 for the bond?50/2000=2 1/2%the higher the bond price,the lower the interest rateAmount of money demanded(billions of dollars)0 50 100 150 200 250 300 107.5 52.5 0DmieSmA temporary shortageof money will requirethe sale of some assetsto meet the needSm1Rate of interest, i (percent)The Money MarketFigure 14-3Everyone sells bonds bond prices fall interest rates riseuntil people are happyholding the lowerquantity of moneyAmount of money demanded(billions of dollars) 107.5 52.5 0DmieAfter adjustments toasset holdings, a newequilibrium will beseen at a higher levelof interestSm10 50 100 150 200 250 300 Rate of interest, i (percent)SmThe Money MarketFigure 14-3Amount of money demanded(billions of dollars) 107.5 52.5 0DmieSm0 50 100 150 200 250 300 Suppose the money supplyis increased from $200 billion, Sm1, to $250 billion Sm2Rate of interest, i (percent)The Money MarketFigure 14-3Amount of money demanded(billions of dollars) 107.5 52.5 0DmSm0 50 100 150 200 250 300 Sm2A temporary surplus of money will requirethe purchase of some assets to meet the desired level of liquidityRate of interest, i (percent)The Money MarketFigure 14-3Amount of money demanded(billions of dollars) 107.5 52.5 0DmSm0 50 100 150 200 250 300 Sm2A temporary surplus of money will requirethe purchase of some assets to meet the desired level of liquidityRate of interest, i (percent)The Money MarketFigure 14-3Everyone buys bonds bond prices rise interest rates falluntil people are happyholding the higherquantity of moneyAmount of money demanded(billions of dollars) 107.5 52.5 0DmieSm20 50 100 150 200 250 300 After adjustments toasset holdings, a new equilibrium will be seen at a lower levelof interestRate of interest, i (percent)SmThe Money MarketFigure 14-3Chapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Monetary Policy, Real GDP,& the Price LevelCause-Effect Chain: The Transmission MechanismMoney supply impacts interest ratesInterest rates affect investmentInvestment is a component of ADEquilibrium GDP is changedPrice levelDmInvestmentDemand10 8 6 010 8 6 0P1ASAD1Q1$50$15Real rate of interest, i55If the money supplyincreases tostimulate theeconomy....Sm1i%i%Real GDP$billions$billionsMonetary Policy and Equilibrium GDP- Fig.14-4© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1ASP1AD1Q1$15$75Sm256Price levelReal rate of interest, ii%Real GDP$billions$billions$50Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1ASP1Sm2AD1Q1$15$7557Interest rates fall as people work off excess money by buying bondsPrice levelReal rate of interest, ii% Real GDP$billions$billions$50Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1ASP1Sm2AD1Q1$15$75$2058Investment increases in response to lower interest costsPrice levelReal rate of interest, ii%Real GDP$billions$billions$50Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1ASP1Sm2AD1AD2Q1$15$75$2059Investment increase increase in AD(multiplier effect)Price levelReal rate of interest, ii%Real GDP$billions$billions$50Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1ASP1Sm2AD1AD2Q1$15$75$20Q260Increase in GDP and price levelP2Price levelReal rate of interest, ii%Real GDP$billions$billions$50Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1ASP1Sm2P2AD1AD2Q1$15$75$20Q261If the money supply increases again...Price levelReal rate of interest, ii%Real GDP$billions$billions$50Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14DmInvestmentDemand10 8 6 010 8 6 0Sm1Sm2$15$75$20AD1AD2AD3ASP1P2Q1Q2Q362Sm3$100P3GDP doesn’t increase as much--multiplier effect weaker because of shape of ASPrice levelReal rate of interest, ii%Real GDP$billions$billions$50$25Monetary Policy and Equilibrium GDP- Fig.14-4i%© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 14Problem: Recessionary Gap© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1463Bank of Canada buys bonds, switches deposits to chartered banks, or bothMoney supply risesReserves increaseInterest rate fallsInvestment spending increasesAggregate demand increasesReal GDP rises by a multiple of the increase in investmentTable 14-2Problem: Inflationary Gap© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1464Bank of Canada sells bonds, switches deposits from chartered banks, or bothMoney supply fallsReserves decreaseInterest rate risesInvestment spending decreasesAggregate demand decreasesInflation declinesTable 14-2AD1AD2AD3ASP1Real GDPQ1Q2Q3Price LevelP2P3Monetary Policy, Real GDP,& the Price Levelas always, the impactof a shift in ADon real GDP and price leveldepends on supplyconditions and the shapeof the AS curveChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Effectiveness of Monetary PolicyStrengths of Monetary PolicySpeed & FlexibilityIsolation from Political PressureSuccess During the 1980s & 1990sShortcomings & ProblemsLess Control?Changes in VelocityCyclical AsymmetryChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Current Focus: The Overnight Loans RateBank of Canada communicates changes in monetary policy by announcing changes in the bank rateThe bank rate is set at the upper limit of the Bank of Canada’s operating band for the overnight loans rateChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”Monetary Policy & the International EconomyNet exports effects reinforce monetary policyProblem: recession, slow growth© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1472Expansionary monetary policy(lower interest rate)Decreased foreign demand for dollarsDollar depreciatesNet exports increaseAggregate demand increasesMonetary policy is reinforcedTable 14-3Problem: inflation© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1473Contractionary monetary policy(higher interest rate)Increased foreign demand for dollarsDollar appreciatesNet exports decreaseAggregate demand decreasesMonetary policy is reinforcedTable 14-3Monetary Policy & the International EconomyMacro Stability & the Trade BalanceThe easy money policy that is appropriate for the alleviation of unemployment & sluggish growth is compatible with the goal of correcting a balance-of-trade deficitThe tight money policy used to alleviate inflation conflicts with the goal of correcting a balance-of-trade deficitChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”The Big PictureKey graph 14-6 (see the text) integrates the various components of macroeconomic theory & stabilization policyChapter 14 TopicsGoals of Monetary PolicyFunctions of the Bank of CanadaConsolidated Balance Sheet of the Bank of CanadaTools of Monetary PolicyThe Demand for MoneyThe Money MarketMonetary Policy, Real GDP, & the Price LevelEffectiveness of Monetary PolicyCurrent Focus: The Overnight Loans RateMonetary Policy & the International EconomyThe “Big Picture”