The Bank of Canada and the Modern View of Central Banking

Abstract

Many observers of the art of central banking would probably argue that the most significant change in the behavior of central banks over the past fifteen years has been the adoption of inflation targeting. Beginning in 1991, Canada was one of the first countries, after New Zealand, to adopt explicit inflation rate targets. While this may be of some interest to policy analysts, we wish to argue that the Bank of Canada has introduced many more innovations in the conduct of monetary policy over the past fifteen years and that these innovations have just as much importance, and possibly more relevance, than explicit inflation targeting. In particular, the new procedures followed by the Bank of Canada take away the veil that has traditionally shrouded monetary theory and policy. With the new procedures, tied to additional transparency a key word now in central banking lingo it is possible to have a better understanding of the actual process of monetary creation/ destruction in contemporary monetary economies like that of Canada. In addition to the new procedures, monetary policy as such has gradually changed, and we wish to record these changes, emphasizing both what has changed and what have remained articles of faith at the Bank of Canada. In other words, while new wine has been added, some of it still remains sitting in old bottles.