THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 418

386

PA R T V

Central Banking and the Conduct of Monetary Policy

INSIDE THE CENTRAL BANK

Role of the Bank s Research Staff
The Bank of Canada is the largest employer of
economists in Canada. What do all these economists do?
The most important task of the Bank s
economists is to follow the incoming data from
government agencies and private sector organizations on the economy and provide guidance
to policymakers on where the economy may be
heading and what the impact of monetary policy actions on the economy might be. Moreover,
the Bank s economists maintain large econometric models (models whose equations are estimated with statistical procedures) that help
them produce forecasts of the national economy, and brief the governor and the senior
management of the Bank on their forecasts for
the Canadian economy.
Because of the increased influence of developments in foreign countries on the Canadian
economy, the research staff produces reports
on the major foreign economies. They also conduct research on developments in the foreign
exchange market because of its growing importance in the monetary policy process and to

support the activities of the Bank s foreign
exchange desk.
Staff economists also engage in basic research
on the effects of monetary policy on output and
inflation, developments in the labour markets,
international trade, international capital markets,

banking and other financial institutions, financial
markets, and regional economy, among other
topics. This research is published widely in academic journals and in Bank of Canada publications. Bank of Canada publications, such as the
Annual Report (published in March each year),
the Bank of Canada Review (published quarterly), the Financial System Review (published in
June and December), the Bank of Canada
Banking and Financial Statistics (published
monthly), the Monetary Policy Report (published
in April and October), and the Monetary Policy
Report Update (published in January and July) are
good sources of supplemental material for
money and banking students.
Another important activity of the research
staff is in the public education area. Staff economists are called on frequently to make presentations to the public.

since it is the government that must answer to Parliament. This system of joint
responsibility dates back to 1967 when the Bank of Canada Act was amended to
give responsibility for monetary policy to the government.

HOW I N DE PE N DEN T I S TH E BAN K OF CAN ADA?
When we look, in the next three chapters, at how the Bank of Canada conducts
monetary policy, we will want to know why it decides to take certain policy
actions but not others. To understand its actions, we must understand the incentives that motivate the Bank s behaviour. How free is the Bank from the whims of
the government? Do economic, bureaucratic, or political considerations guide it?
Is the Bank truly independent of outside pressures?
Stanley Fischer, who was a professor at MIT and is now governor of the Bank of
Israel, has defined two different types of independence of central banks: instrument independence, the ability of the central bank to set monetary policy instruments, and goal independence, the ability of the central bank to set the goals of
monetary policy. Unlike the U.S. Federal Reserve and the European Central Bank