 Bank of Canada: Canada’s central bank since 1935  aka the “Bank”  Responsible for 4 operations:  Manage the money supply  Act as “the bankers’ bank”  Act as federal government’s fiscal agent  Ensuring the stable operation of financial markets The Bank of Canada

 Control the amount of money circulating in the economy  Issues paper currency  The Bank’s three goals are:  Minimize inflation to preserve purchasing power of the dollar  Maintain real output as close as possible to its potential level  Regulating the external value of the Canadian dollar on foreign exchange markets Managing the Money Supply

 Many financial institutions in Canada are members of the CPA  CPA: Canadian Payments Association  When a CPA member finds that its account is too low, it can borrow from the Bank of Canada  The interest rate charged on these advances is called the bank rate  If your friend is a member of Bank A and writes you a cheque for $100, you take that cheque to your bank, Bank B, and deposit it  The funds are then transferred from each bank’s account with the Bank of Canada  Bank A then cancels the cheque it has received and reduces the depositor’s account by $100 Acting as the Bankers’ Bank

 In order to keep track of the business of spending and taxing, the federal government needs a bank to manage its transactions and financial assets  The Bank holds some of the government’s bank deposits and decides where the other deposits should be held  It clears government cheques (acts as government’s banker)  Handles financing of the federal gov’t’s debt by issuing bonds Acting as the Federal Government’s Fiscal Agent

 Canada Savings Bonds  Federal government bonds that have a set value throughout their term  Treasury Bills  Short-term federal government bonds that provide no interest, but are sold at a discount  e.g. a one year treasury bill might be worth $100,000, but is sold at $95, 000  These bills are handed out in an auction – the highest bidder gets the bills Acting as the Federal Government’s Fiscal Agent cont’d

 Bank of Canada “supervises” operation of financial markets to ensure their stability  e.g. helps protect safety of depositors’ funds  In the 2008 financial crisis, many banks in the US and Europe experienced a collapse, but not in Canada Ensuring Stability of Financial Markets

 Their was a bubble in real-estate values  Banks were lending out money for mortgages, but weren’t being paid back as soon as they hoped  The only way the banks were staying afloat was by government financial aid  Companies that were intent on borrowing money for investments now couldn’t  Everyone learned a big lesson from Japan’s mistake Crisis in Japan (2 decades ago)