THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 494

CHAPTER 18

The Conduct of Monetary Policy:
Strategy and Tactics

LE A RNI NG OB J ECTI VES
After studying this chapter you should be able to
1. assess the different types of monetary policy strategy
2. list the advantages and disadvantages of inflation targeting
3. specify the role of a nominal anchor in the conduct of monetary policy
4. outline Bank of Canada policy procedures from a historical perspective

PRE VI EW

Getting monetary policy right is crucial to the health of the economy. Overly
expansionary monetary policy leads to high inflation, which decreases the efficiency of the economy and hampers economic growth. Monetary policy that is too
tight can produce serious recessions in which output falls and unemployment
rises. It can also lead to deflation, a fall in the price level, such as occurred in the
United States during the Great Depression and in Japan more recently. As we saw
in Chapter 9, deflation can be especially damaging to an economy, because it promotes financial instability and can trigger financial crises.
Now that we understand the tools that central banks such as the Bank of Canada
use to conduct monetary policy, we can consider how central banks should conduct monetary policy. To explore this subject, we first examine three monetary policy strategies, all of which focus on price stability as the primary, long-run goal of
monetary policy. We then look at tactics, that is, the choice and setting of the monetary policy instrument in use. After examining the strategies and tactics, we can
evaluate the Bank of Canada s conduct of monetary policy in the past, with the
hope that it will give us some clues to where monetary policy may head in the
future.

MO NE TARY TARGE T IN G STRAT EG Y
In pursuing a strategy of monetary targeting, the central bank announces that it
will achieve a certain value (the target) of the annual growth rate of a monetary
aggregate, such as a 5% growth rate of M1+ or a 6% growth rate of M2+. The central bank then is accountable for hitting the target.

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