THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 417

CHAPTER 15

Central Banks and the Bank of Canada

385

(also called monetary base) consists of the monetary liabilities of the central
bank and, as you will see in the next chapter, is an important part of the money
supply, because changes in it lead to multiple changes in the money supply. Of
course, lender-of-last-resort lending is closely coordinated with the two federal
regulatory agencies that are set up specifically to regulate financial institutions
the Office of the Superintendent of Financial Institutions Canada and the Canada
Deposit Insurance Corporation.1 Moreover, such lending is done judiciously,
explicitly considering the effects on other financial institutions, the money supply, and government policy.
The Bank of Canada also plays a central role in Canada s national payments
system (to be discussed in some detail in Chapter 17). This is essentially an electronic system that clears and settles payments and transactions including securities
and foreign exchange, currently handling 15 times our gross domestic product per
year. Although this system is operated by the Canadian Payments Association, federal legislation that came into force in 1996 gave the Bank explicit responsibility
for the regulatory oversight of this system. The Bank s main concern is whether
problems that affect one participant in the clearing and settlement system will
spread to other participants.
Finally, the Bank of Canada acts as the holder of deposit accounts of the federal government, the directly clearing members of the Canadian Payments
Association, international organizations such as the International Monetary Fund,
and other central banks. As the federal government s banker, the Bank is also
responsible for the government s operating accounts. In this role, as you will see
in Chapter 17, the Bank shifts government balances between the government s
transactions account with the Bank and the government s non-transactions
accounts with the banks, using twice-daily auctions of government term deposits.

Monetary
Policy

The Bank of Canada employs such tools as open market buyback operations
(the purchase and sale of government securities that affect both interest rates and
the amount of reserves in the banking system) and, to a lesser extent, the shifting
of government balances between it and the directly clearing members of the
Canadian Payments Association to implement changes in the money supply. The
Bank s ultimate objective is to keep inflation low. The Bank has a staff of professional economists, which provides economic analysis that the Board of Directors
uses in making its decisions (see the Inside the Central Bank box, Role of the
Bank s Research Staff).
The Bank s goal of low inflation is closely related to the goal of steady economic growth, because businesses are more likely to invest in capital equipment
to increase productivity and economic growth when inflation is low. Low inflation
is also desirable because it protects the purchasing power of pensioners and those
on fixed incomes.2
Although the Bank determines monetary policy, in the following section you
will learn that the ultimate responsibility for policy rests with the government,

1

The Office of the Superintendent of Financial Institutions Canada was created in 1987 to succeed the
Department of Insurance and the Inspector General of Banks, whereas the Canada Deposit Insurance
Corporation was created by an act of Parliament in 1967 to insure deposits, currently up to $100 000
per account, of member deposit-taking institutions.

2

See the Web Appendix to Chapter 15 on this book s MyEconLab (www.pearsoned.ca/myeconlab)
for a discussion of the Bank of Canada s goal of price stability and the monetary policy used to achieve
it.