THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 412

PA R T V

Central Banking and the Conduct
of Monetary Policy

Chapter 15 Central Banks and the Bank of Canada
Chapter 16 The Money Supply Process
Chapter 17 Tools of Monetary Policy
Chapter 18 The Conduct of Monetary Policy: Strategy and Tactics

CRISI S AN D RESP O NSE : T HE BAN K O F CAN ADA S
MO NE TARY P OL ICY AN D LI QU I DI TY P ROVI SIO N
DUR IN G T HE F I NA NCI AL CRI SI S
The onset of the subprime financial crisis in August 2007 was a curve ball for central banks around the world. The crisis, described by former Federal Reserve
Chairman Alan Greenspan as a once-in-a-century credit tsunami, had the potential to devastate the world economy.
The Bank of Canada resolved to come to the rescue of the Canadian economy.
Starting in September of 2007, the Bank of Canada enacted monetary policy at a
rapid rate by reducing the overnight interest rate. Specifically, the Bank lowered
the overnight rate target in December by 25 basis points (0.25 percentage points)
from 4.50% to 4.25%, and eventually drove the overnight rate target down to 0.25%
by April of 2009.
At the same time, the Bank of Canada implemented large liquidity injections
into the credit markets to try to get them lending again. Over the course of the crisis, the Bank broadened its provision of liquidity to the financial system well outside of its traditional lending to depository institutions. The number of new Bank
of Canada instruments over the course of the crisis spawned a whole new terminology, including term PRAs, quantitative easing, and credit easing, making the
Bank of Canada sound like the military with code-named initiatives and weapons.
Like the military, the Bank of Canada was fighting a war, although its weapons
were financial rather than physical.
The recent financial crisis has demonstrated the importance of central banks
like the Bank of Canada to the health of the financial system and the economy.
Chapter 15 outlines what central banks are trying to achieve, what motivates them,
and how they are set up. Chapter 16 describes how the money supply is determined. In Chapter 17, we look at the tools that central banks like the Bank of

Canada have at their disposal and how they use them. Chapter 18 extends the discussion of how monetary policy is conducted to focus on the broader picture of
central banks strategies and tactics.
380