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Role of Central Bank in the economy

Discuss about the Canadian Economy and Monetary Policy Effectiveness.

The paper intends to study in detail the economy of Canada. The paper will look at the various aspects of central bank functioning in the country; economic situation in the country. The economic scenario of the country needs to be looked in conjunction with the central bank and its measures. The central bank of aggressive economies generally front loads interest rate cuts to fuel economic growth. However we will discuss all this aspects in relation to the Canadian economy. We will all discuss views on recent comments by Mr. Morrison (Australian Chief Treasurer) and see how and if fits the Canadian economy conjunction. The paper also intends to look at how central bank’s and its chief measures which is the monetary policy as a tool becoming less effective. Some recent major economist have over the last few years have commented on how monetary policy as a tool is becoming really ineffective. The other concern which has been ailing the markets has been the results of the presidential election in United States. Markets were expecting that democrat candidate will win the election and there will be no major changes or stance shift in the economy of United States. However the unexpected win of Republican Candidate Donald Trump, has increased uncertainty in the global markets. Market participants are jittery over the unexpected turn of events and capital flights has already started towards safe haven assets. The other concern which is line with the uncertainty, is the stance of Federal Reserve in upcoming times. Will the Federal Reserve be able to maintain the continuity in the system or the market participants are in for a surprise are some of the key questions which need answer in the near future. 

The Central Bank of Canada is known by the common name Bank of Canada. As any other Central Bank the core function of the bank is to maintain low level of inflation in the economy. As a developed nation this is not a major challenge, the major challenge for Bank of Canada lies in maintaining the growth momentum in the economy alongside minimum level of inflation. As per the charter of Bank of Canada, it is defined that four major functions of the bank is to maintain proper monetary position using monetary policy; creating a safe and sound financial system in the economy of Canada; design and issue currency of the country from time to time as per the requirement of the nation; and finally manage the funds for the government. At the end of the day Central Bank of the country is actually a chief banker to the government of the country. It manages the fund on behalf of the government and maintain financial stability of the country.

Mr. Morrison’s view on effectiveness of monetary policy

In one of the recent interview with ABC television, Mr. Morrison (Chief Australian Treasurer), indicated that it is not possible for Reserve bank of Australia raised concern about the inability of the bank to reduce rate further in the economy. He also questioned whether the current day monetary policy tools are effective enough to do what they are intended to. This discussion on monetary policy and its effectiveness has been doing rounds after Wall street Journal published an article carrying out analysis of monetary policy and its current economic impact. Economists globally has questioned whether the monetary policy remains an effective measure anymore to reach to ailing economy. A recent journal released by International Monetary Fund, questions and studies the impact of monetary policy. The research highlights how monetary policy are now becoming ineffective even if the Central Bank of the country is front loading the policy rates. The reason sighted is the ultra-loose monetary policy maintained for too long and also the increase impact of global events across the world. Nowadays no country lives in isolation and the opening up of economies has brought in growth; but it also bought in concerns related to how economies and local markets reach when the going becomes tough in the larger economies. Countries like Britain, regions like Europe and Middle-East are still in fragile condition. The excessive use of Quantitative easing is also not helping matters, however economist over the world believes that QE is still a better measure for Central Banks than monetary policy.

In its last monetary policy review, Bank of Canada maintained the long term interest rate in the economy at ½ percent. The corresponding bank rate stands in the economy at 0.75% and the deposit rate in the economy stood at 0.25%. This is a situation of an ultra-loose monetary policy which has been the stand for most of the developed nation since the events unfolded post 2008 recession across the globe. As per Bank of Canada, it is expected that global economy will gain traction in second half of 2016 and early part of 2017. It is believed that solid consumption theory and wave will take the momentum in the economy forward. The Bank of Canada is of the view that they will continue to be accommodating monetary policy conditions till most of 2018. The fiscal measures will also be in line with accommodative monetary policy stance.

Discussion on effectiveness of the monetary policy

However as per Mr. Morrison view, it would be interesting to see how effective such monetary policy stance is under the current global economic scenario.

Recent macroeconomic data has suggested some amount of weakness in the economy. The Bank of Canada has failed in predicting the rate of growth in the country. The same fact has been acknowledged by Bank of Canada in its recent monetary policy review which was announced in October 2016. The main reason attributed for this slowdown or unpredictable growth rate is the unstable housing market. The housing market has been facing huge slowdown in Canada and that has been one of the major concern for the economy. The federal Government of the country has taken string initiatives to increase stability in the housing segment, however as of now no major improvement indicator has been visible. This is a situation of an ultra-loose monetary policy which has been the stand for most of the developed nation since the events unfolded post 2008 recession across the globe. As per Bank of Canada, it is expected that global economy will gain traction in second half of 2016 and early part of 2017. It is believed that solid consumption theory and wave will take the momentum in the economy forward. The Bank of Canada is of the view that they will continue to be accommodating monetary policy conditions till most of 2018. The fiscal measures will also be in line with accommodative monetary policy stance.

Recent macroeconomic data has suggested some amount of weakness in the economy. The Bank of Canada has failed in predicting the rate of growth in the country. The same fact has been acknowledged by Bank of Canada in its recent monetary policy review which was announced in October 2016. The main reason attributed for this slowdown or unpredictable growth rate is the unstable housing market. The housing market has been facing huge slowdown in Canada and that has been one of the major concern for the economy. The federal Government of the country has taken string initiatives to increase stability in the housing segment, however as of now no major improvement indicator has been visible.

The Bank of Canada is of the view that they will continue to be accommodating monetary policy conditions till most of 2018. The fiscal measures will also be in line with accommodative monetary policy stance. As per estimates from Bank of Canada it is expected that real GDP of the country will grow by 1.1% in 2016, followed by 2% in both 2017 and 2018. The core inflation in the economy is currently standing at 2% and it is expected to be nearby that number for a while now.

Concern on the growth rate of the country and housing market troubles

As per World Bank report it is expected that economy of Canada will grow by 1% in 2016 and 1.8% in next two years. The housing market has been facing huge slowdown in Canada and that has been one of the major concern for the economy. The federal Government of the country has taken string initiatives to increase stability in the housing segment, however as of now no major improvement indicator has been visible.

The Bank of Canada is of the view that they will continue to be accommodating monetary policy conditions till most of 2018. The fiscal measures will also be in line with accommodative monetary policy stance. As per estimates from Bank of Canada it is expected that real GDP of the country will grow by 1.1% in 2016, followed by 2% in both 2017 and 2018. The core inflation in the economy is currently standing at 2% and it is expected to be nearby that number for a while now.

There are many global issues which are ailing different economies of the world. At the one end of the world it is the BREXIT which is keeping the investors at bay, and on the other end it is the uncertain environment post the presidential election results in United States. BREXIT is now a known phenomenon, however whether the world will see a soft BREXIT or hard BREXIT is ailing the world markets. The stability has been hurt and markets are jittery. The world markets have reaped benefits of open economy system for years, and the referendum results in United Kingdom has raised question whether the world is moving towards a situation when closed or semi open system of economies again start gaining traction. Recently the Italian referendum results have added fuel to the debate. A hard BREXIT and supposedly similar reaction in different countries of Euro group has the capacity to bring havoc in the European Region. It is widely believed that in such a scenario, it is possible that the Europe Union will break and single region benefits will be lost.

The other concern which has been ailing the markets has been the results of the presidential election in United States. Markets were expecting that democrat candidate will win the election and there will be no major changes or stance shift in the economy of United States. However the unexpected win of Republican Candidate Donald Trump, has increased uncertainty in the global markets. Market participants are jittery over the unexpected turn of events and capital flights has already started towards safe haven assets. The other concern which is line with the uncertainty, is the stance of Federal Reserve in upcoming times. Will the Federal Reserve be able to maintain the continuity in the system or the market participants are in for a surprise are some of the key questions which need answer in the near future. 

Major economic indicators

There are many deposit taking institutions in Canada. They are regulated by the Bank of Canada, however the banking act do not have the same reporting standards for the same. A company which is issuing Commercial Papers don’t need to provide any asset and liability management report on the daily basis. There are many payment banks which strives in keeping some small deposits of customers and help in meeting the payment needs digitally.

The Canadian Economy is facing huge concern in the housing market. This is one major concern for the economy and the resultant effects are already visible in the growth rate of the country. There is a need of strong fiscal measure and government policies to stop foreclosures in the housing market. Some amount of QE in the system can help the country revive back to predictable growth measures. As the article of Mr. Morrison suggested, the monetary policy effectiveness now needs to be questioned and studied. The housing market has been facing huge slowdown in Canada and that has been one of the major concern for the economy. The federal Government of the country has taken string initiatives to increase stability in the housing segment, however as of now no major improvement indicator has been visible. In one of the recent interview with ABC television, Mr. Morrison (Chief Australian Treasurer), indicated that it is not possible for Reserve bank of Australia raised concern about the inability of the bank to reduce rate further in the economy. He also questioned whether the current day monetary policy tools are effective enough to do what they are intended to. He highlighted in era of globalization and such low interest rates, in some cases even negative interest rate, monetary policy as a tool has lost its impact. This discussion on monetary policy and its effectiveness has been doing rounds after Wall street Journal published an article carrying out analysis of monetary policy and its current economic impact. Economists globally has questioned whether the monetary policy remains an effective measure anymore to reach to ailing economy.

Conclusion

The Bank of Canada has failed in predicting the rate of growth in the country. The same fact has been acknowledged by Bank of Canada in its recent monetary policy review which was announced in October 2016. The main reason attributed for this slowdown or unpredictable growth rate is the unstable housing market. The housing market has been facing huge slowdown in Canada and that has been one of the major concern for the economy. The federal Government of the country has taken string initiatives to increase stability in the housing segment, however as of now no major improvement indicator has been visible. In one of the recent interview with ABC television, Mr. Morrison (Chief Australian Treasurer), indicated that it is not possible for Reserve bank of Australia raised concern about the inability of the bank to reduce rate further in the economy. He also questioned whether the current day monetary policy tools are effective enough to do what they are intended to. He highlighted in era of globalization and such low interest rates, in some cases even negative interest rate, monetary policy as a tool has lost its impact. This discussion on monetary policy and its effectiveness has been doing rounds after Wall street Journal published an article carrying out analysis of monetary policy and its current economic impact. Economists globally has questioned whether the monetary policy remains an effective measure anymore to reach to ailing economy. A recent journal released by International Monetary Fund, questions and studies the impact of monetary policy. The research highlights how monetary policy are now becoming ineffective even if the Central Bank of the country is front loading the policy rates.

What are the estimates of growth for the country?

References

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Georgiadis, G. and Mehl, A., 2015. Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness

Hanif, M.N. and Iqbal, J., 2016.Assessing Monetary Policy Effectiveness in Rich Data Environment (No. 80). State Bank of Pakistan, Research Department

Imam, P.A., 2015. Shock from graying: Is the demographic shift weakening monetary policy effectiveness.International Journal of Finance & Economics, 20(2), pp.138-154

Li, E.X. and Li, P.S., 2016. Immigrant Enclave Thesis Reconsidered: Case of Chinese Immigrants in the Enclave and Mainstream Economy in Canada.Journal of International Migration and Integration, 17(1), pp.131-151.

Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian economy. Economic Modelling, 47, pp.53-62

Morissette, C., 2014.The Underground Economy in Canada, 1992 to 2011. Statistics Canada

Rees, D.M., Smith, P. and Hall, J., 2016. A Multi?sector Model of the Australian Economy.Economic Record

Rey, H., 2015.Dilemma not trilemma: the global financial cycle and monetary policy independence (No. w21162). National Bureau of Economic Research

Robinson, T., Tsiaplias, S. and Nguyen, V.H., 2015. The Australian Economy in 2014–15: An Economy in Transition.Australian Economic Review, 48(1), pp.1-14

Schneider, F., 2013. Size and development of the shadow economy of 31 European and 5 other OECD countries from 2003 to 2013: a further decline.Johannes Kepler Universität, Linz, pp.5-7

Sheen, J., Trück, S. and Wang, B.Z., 2015. Daily Business and External Condition Indices for the Australian Economy.Economic Record, 91(S1), pp.38-53

Sims, C.A., 2016, August. Fiscal Policy, Monetary Policy and Central Bank Independence. InDesigning Resilient Monetary Policy Frameworks for the Future: A Symposium Sponsored by the Federal Reserve Bank of Kansas City

Smith, A., 2016. Unrelenting: a media-focused political economy analysis of antidepressant use in Canada

Southcott, C. and Walker, V., 2015. A portrait of the social economy in northern Canada.Northern Communities Working Together: The Social Economy of Canada's North, p.21

Wu, J.C. and Xia, F.D., 2016. Measuring the macroeconomic impact of monetary policy at the zero lower bound.Journal of Money, Credit and Banking, 48(2-3), pp.253-291

Zhang, H.E., 2015.The sustainability of European Monetary Union. Evidence from business cycle synchronisation, monetary policy effectiveness and the Euro fiscal dividend (Doctoral dissertation, University of Bradford)

Rey, H., 2015.Dilemma not trilemma: the global financial cycle and monetary policy independence (No. w21162). National Bureau of Economic Research

Robinson, T., Tsiaplias, S. and Nguyen, V.H., 2015. The Australian Economy in 2014–15: An Economy in Transition.Australian Economic Review, 48(1), pp.1-14

Schneider, F., 2013. Size and development of the shadow economy of 31 European and 5 other OECD countries from 2003 to 2013: a further decline.Johannes Kepler Universität, Linz, pp.5-7

Sheen, J., Trück, S. and Wang, B.Z., 2015. Daily Business and External Condition Indices for the Australian Economy.Economic Record, 91(S1), pp.38-53

Sims, C.A., 2016, August. Fiscal Policy, Monetary Policy and Central Bank Independence. InDesigning Resilient Monetary Policy Frameworks for the Future: A Symposium Sponsored by the Federal Reserve Bank of Kansas City

Smith, A., 2016. Unrelenting: a media-focused political economy analysis of antidepressant use in Canada

Southcott, C. and Walker, V., 2015. A portrait of the social economy in northern Canada.Northern Communities Working Together: The Social Economy of Canada's North, p.21

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