Question

Access the Bank of Canada web site to answer the four parts below.

1. [5 marks] Visit the “Statistics” tab to locate data (under Indicators) on the recent history of the following groups of monetary variables: (i) inflation control target; (ii) policy instrument; and (iii) monetary aggregates. Present monthly data of each set of variables in tabular form from January 2019 to January 2020 inclusive. (Please do not print the table directly from the website, Make a neat and precise one page table for only the months required, An MS Excel table is ideal to do this neatly and compactly.)

2. [9 marks] Explain in detail what each variable represents, use Bank of Canada’s website to find the answer to this question.

3. [9 marks] Explain the economic reasons for the evolution in the variables from January 2019 to January 2020 inclusive.

4. [7 marks] Find the Bank’s latest press release (June 2020) about overnight rates and explain why the Bank decided to change (or not to change) its target for the overnight rate. Be sure to explain the details about COVID-19. Attach the press release to your answer.

Answer 1

This question is based on an assignment which includes details of bank of canada and hence the some figures and data might have taken from there official website, monetory report and press release. So please consider this while checking for plagerism.

a.

Date	Inflation-control target	Monetary aggregates1	Policy instrument
Target range	Total CPI	M1+ (gross)	M1++ (gross)	M2++ (gross)	Overnight rate target (end of month)	Overnight rate
	12-month growth rate	12-month growth rate
2020-01	1-3	2.4	7.8	7.2	6.5	1.75	1.7487
2019-12	1-3	2.2	7.4	6.9	6.5	1.75	1.7479
2019-11	1-3	2.2	7.2	6.6	6.6	1.75	1.7487
2019-10	1-3	1.9	7.4	6.8	6.5	1.75	1.7472
2019-09	1-3	1.9	7	6.8	6.3	1.75	1.7454
2019-08	1-3	1.9	6.4	6.3	6.2	1.75	1.7481
2019-07	1-3	2	5.9	5.9	6	1.75	1.7469
2019-06	1-3	2	4.8	5.1	5.8	1.75	1.7429
2019-05	1-3	2.4	5.1	5.2	5.8	1.75	1.745
2019-04	1-3	2	4	4.2	5.6	1.75	1.7459
2019-03	1-3	1.9	3.6	3.6	5.2	1.75	1.7461
2019-02	1-3	1.5	3.7	3.4	5.1	1.75	1.7455
2019-01	1-3	1.4	4.2	3.4	5.1	1.75	1.7462

b.

Inflation-control target

The inflation-control target was adopted by the Bank and the Government of Canada in 1991 and has been renewed several times since then, most recently in October 2016 for the five years to the end of 2021. The target aims to keep total CPI inflation at the 2 per cent midpoint of a target range of 1 to 3 per cent over the medium term. The Bank raises or lowers its policy interest rate, as appropriate, in order to achieve the target typically within a horizon of six to eight quarters—the time that it usually takes for policy actions to work their way through the economy and have their full effect on inflation.

Policy Instrument: The average rate that the Bank wants to see in the market for overnight money market financing. When the Bank changes the Overnight Rate Target, this change usually affects other interest rates, including mortgage rates and prime rates charged by commercial banks. This rate is also the most appropriate rate to use when making international comparisons.

It corresponds to the U.S. fed funds target, the two-week repo rate at the Bank of England, and the minimum bid rate for refinancing operations (the Repo Rate) at the European Central Bank

Monetary Aggregates:

M1+ (gross):

Currency outside banks plus personal and non-personal chequable deposits held at chartered banks plus all chequable deposits at trust and mortgage loan companies, credit unions and caisses populaires (excluding deposits of these institutions) plus continuity adjustments.

M1++ (gross):

M1+ (gross) plus non-chequable notice deposits held at chartered banks plus all non-chequable deposits at trust and mortgage loan companies, credit unions and caisses populaires less interbank non-chequable notice deposits plus continuity adjustments.

M2++ (gross):

M2+(gross) plus Canada Savings Bonds and other retail instruments plus cumulative net contributions to mutual funds other than Canadian dollar money market mutual funds (which are already included in M2+ (gross)).

c. In 2016, the Government and the Bank of Canada renewed Canada’s inflation-control target for a further five-year period, ending December 31, 2021. The target, as measured by the consumer price index (CPI), remains at the 2 percent midpoint of the control range of 1 to 3 percent.

Monetary policy actions take time—usually from six to eight quarters—to work their way through the economy and have their full effect on inflation. For this reason, monetary policy must be forward-looking.

d.The necessary efforts to contain the COVID-19 pandemic have caused a sudden and deep contraction in economic activity and employment worldwide.The Bank of Canada on June 2020 maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent as the COVID-19 pandemic is still ongoing, and the Canadian economy still affected. The impact of the pandemic on the global economy appears to have peaked, although uncertainty about how the recovery will unfold remains high.Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery