Towards a Made-in-Canada Monetary Policy: Closing the Circle

When the Bank of Canada was first established in 1935, it had two very different models to choose from--the Bank of England and the U.S. Federal Reserve--in terms of the instruments that it might use for implementing monetary policy. Although some aspects of the Bank's early monetary policy practices, including the adjustments in the discount rate and moral suasion, reflect the British example, other important differences shaped a distinctly Canadian approach. Chant describes what he argues are distinctively Canadian innovations: the Bank's favoured means of managing chartered bank liquidity through transfers of government deposits, the adoption of lagged reserve requirements, and the two periods in which it decided to float the Bank Rate. He also describes the series of bold initiatives that were undertaken in the 1990s with regard to simplifying clearing and settlement procedures, reducing reserve requirements, and setting the Bank's target for the overnight rate. Chant suggests that these changes have improved market efficiency, reduced risk and uncertainty, and strengthened the Bank's influence over its short-term operating target.