THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 433

CHAPTER 15

Central Banks and the Bank of Canada

401

ment further that policy is always performed better by elite groups like the Bank of
Canada, we end up with such conclusions as the Canada Revenue Agency should set
tax policies with no oversight from the government. Would you advocate this degree
of independence for the Canada Revenue Agency?
The public holds government responsible for the economic well-being of the
country, yet it lacks control over the government agency that may well be the most
important factor in determining the health of the economy. In addition, to achieve a
cohesive program that will promote economic stability, monetary policy must be
coordinated with fiscal policy (management of government spending and taxation).
Only by placing monetary policy under the control of the politicians who also control fiscal policy can these two policies be prevented from working at cross-purposes.
There is no consensus on whether Bank of Canada independence is a good
thing, although public support for independence of the central bank seems to have
been growing in both Canada and abroad. As you might expect, people who like
the Bank s policies are more likely to support its independence, while those who
dislike its policies advocate a less-independent Bank of Canada.

Global Central
Bank Independence and
Macroeconomic
Performance

We have seen that advocates of central bank independence believe that macroeconomic performance will be improved by making the central bank more independent.
Recent research seems to support this conjecture: when central banks are ranked from
least independent to most independent, inflation performance is found to be the best
for countries with the most independent central banks.16 Although a more independent central bank appears to lead to a lower inflation rate, this is not achieved at the

expense of poorer real economic performance. Countries with independent central
banks are no more likely to have high unemployment or greater output fluctuations
than countries with less-independent central banks.

S U M M A RY
1. The Bank of Canada was created by an act of
Parliament in 1934 and began operations on March 11,
1935. Initially it was privately owned but became a
Crown corporation in 1938.
2. The overall responsibility for the operation of the
Bank of Canada rests with a Board of Directors, consisting of the governor, the senior deputy governor,
the deputy minister of finance, and twelve outside
directors. The Bank s governor (currently Mark
Carney) is the chief executive officer and chairman of
the Board of Directors.
3. Although on paper the Bank of Canada is an arm of
the government, in practice the Bank has more independence than the Bank of Canada Act suggests.

16

4. The Bank of Canada is more independent than most
agencies of the Canadian government, but it is still
subject to political pressures. The theory of bureaucratic behaviour indicates that one factor driving the
Bank s behaviour is its attempt to increase its power
and prestige. This view explains many of the Bank s
actions, although the agency may also try to act in
the public interest.
5. The case for an independent Bank of Canada rests on
the view that curtailing the Bank s independence and
subjecting it to more political pressures would impart

an inflationary bias to monetary policy. An independent Bank of Canada can afford to take the long view
and not respond to short-run problems that will result

Alberto Alesina and Lawrence H. Summers, Central Bank Independence and Macroeconomic
Performance: Some Comparative Evidence, Journal of Money, Credit and Banking 25 (1993): 151 162.
However, Adam Posen, Central Bank Independence and Disinflationary Credibility: A Missing Link,
Oxford Economic Papers 50 (1998): 335 359, has cast some doubt on whether the causality runs from
central bank independence to improved inflation performance.