In: Economics
List 3 tools of Bank of Canada for monetary control. Explain how Bank of Canada uses the open market operations under regular circumstances and when does it use quantitative easing. How quantitative easing is different from the Bank’s regular open market operation.
Following are 3 tools -
1. Open market operation - when central bank buys and sells securities and tressury bills.
2. Reserve requirements - reserve banks hs to maintain either with themselves or with central bank . Bank of Canada fixes the value of there reserve . Higher value means Contractionary monentary policy and lower values of reserve means expansionary policy
3. Discount rate - rate at which central bank gives loans to commercial banks . High rate means Contractionary measure and vice versa
Now under regult circumstances -
1 expansionary policy - In order to increase growth and investment, bank of Canada purchases security to inguse liquidity with private banks which will increase money supply
2 Contractionary policy - In order to control inflation, central banks buys servurities from private banks to soak liquidity so tht money supply can be reduced
Quantitative easing is a measure under open market operation which is used under more grave situations to get growth and investment quickly
In this central bank purchases longer term securities to induce money supply in the economy and encourage growth and investment.
Bank of Canada has started using this in covid 19 times to ensure tht , supply of money increased through this policy may lowers interest rate of money at lower positions even to zero. lfor example now in covid-19 situation Canada central bank uses this quantitative easing in open market to induce liquidity They do this with printing new money so that they can purchase govt securities .