eal national income and the price level. These ultimate objectives of the Bank’s policy are called policy variables.The variables that it directly controls to achieve these objectives are called its policy instruments.The Banks also has intermediate targets, which are neither the ultimate objective of policy nor are they under the direct control of the Bank. Intermediate targets nevertheless play a key role in the execution of monetary policy; their importance lies in their close relationship to policy variables.The Bank of Canada’s twin policy variables are real national income and the price level.Short Run: Nominal National Income. Although the Bank cares about the separate reactions of the price level and the real output, there is little that it can do in the short run to control them independently. Monetary policy is therefore not capable of pushing the price level (P) and the real national income (Y) toward independently determined targets simultaneously. For this reason, central banks often focus on nominal national income (PY) as the target for monetary policy in the short run.Long Run: The Price Level. Because the LRAS curve is vertical, this implies that the only long run impact of monetary policy will be on the price level.The instruments used by the Bank of Canada to conduct monetary policy are open-market operations and switching government deposits at the chartered at the chartered banks. These are the ways the Bank changes the reserves of the banking system.Central banks have typically used intermediate targets to guide them when implementing monetary policy in the very-short run. To serve as an intermediate target, a variable must satisfy two criteria.First, information about it must be available on a frequent basis, daily if possible.Second, its movements must be closely correlated with those of the policy variable, so that changes in it can reasonably be expected to indicate that the policy variable ...
