Economics 3215 Assignment 2
Due: October 17, 2017
1. To answer the following see Chapter 16 and the Bank of Canada website
(a) Define: (i) overnight interest rate; (ii) Bank rate; and (iii) Operating band
(b) On the Bank of Canada webpage highlight the ‘Statistics’ tab and under resulting pulldown menu click ‘Indicators’. Click on ‘Summary of Key Monetary Policy Variables’.
(i) In the resulting table find the most recent value for the overnight rate target. Report it and the date to which it applies. How close was it to the actual value of the overnight rate on the reported date? Scan further down the table: how much does the target typically differ from the actual value of the overnight rate? Does it appear that the Bank of Canada is able to achieve its announced targets?
(ii) Click the chart icon for the Overnight rate target. Copy the chart. What was the level of the overnight rate in July 2007 (just before the US financial crisis)?How did the Bank of Canada change the overnight rate in response to the financial crisis of 2007-08? What has happened to the rate since the crisis?
2. Applying the Chapter 16 model of overnight rate determination.
(a) Draw a diagram showing equilibrium in the overnight market on July 2007 (be sure to include the demand and supply curves, the July 2007 equilibrium level of the overnight rate from Question 1, part (b) and the associated ceiling and floor level of the operating band).
(b) When a crisis occurs(private) banks typically wish to hold more reserves. Show how this would change your diagram in (a). If this were the only thing affecting the overnight market,what would happen to the overnight rate and the quantity of reserves held by the banking system?
(c) What actually happened to the equilibrium rate during the crisis? (seeyour answer to Question 1) How does what actually happened compare to your answer in (b)? What must the Bank of Canada have done in order to produce a result different from that in (b)? Redraw your diagram from (b) to incorporate the Bank of Canada’s response.
(d) The Bank of Canada balance sheet for 2007 showed that it held $24 billion in Treasury bills and securities purchased under Purchase and Resale Agreements (PRAs) and had made $1.5 million in Advances to private banks. By the end of 2008 these figures were $47 billion and $1.9 billion respectively. What reserve management measures does it appear the Bank of Canada used to implementthe policy in part (c)?
3. The Bank of Canada targets the overnight interest rate when conducting monetary policy. Draw on the material in the text (Ch. 16) to compare the US system to the Canadian system of overnight rate targeting. In your answer be sure to define the key US policy rates.
4. When deciding on its target level for the overnight rate the Bank of Canada consults its macroeconomic forecast of the Canadian economy. In July 2017 the Bank of Canada released its most recentMonetary Policy Report ( ). Have a lookthrough the report and in particular it’s discussion of how the Canadian economy performed in 2017 and how it is expected to perform in 2018 and 2019.
(a) How fast is real GDP expected to grow in 2018 and 2019? How does this compare to 2017?
(b) Read what the Report says about Consumer spending. How much is it expected to contribute to real GDP growth? Why is it growing? What does the report say about investment spending by businesses?
(c) The Bank of Canada targets inflation. How has inflation been performing compared to the Bank of Canada’s2% target rate? What does the Bank of Canada think will happen to inflation in the future? Explain why.
(d) Based on the analysis underlying theMonetary Policy Report, the Bank of Canada sets the overnight rate target.
(i) You can find the July 12thannouncement at: How did the Bank of Canada change the rate in July?
(ii) Bank of Canada Governor Stephen Poloz discusses the thinking behind the July decision here: . Based on his statement explain the reasoning behind the July 2017 rate change. Be sure to mention why the rate was raised even though inflation at the time was below 2%.
(iii) What did the Bank of Canada do to the overnight rate target in its September 6 announcement? Why? (see: )