is also changing (or will do so in the future).The two most commonly used intermediate targets have been the money supply and the interest rate.The Bank of Canada cannot expect to be able to use its control of the monetary base to influence both the interest rate and the money supply independently.In the 1970’s, the Bank of Canada focused on the money supply as its intermediate target. Problems arose when the Bank focused exclusively on M1 as its intermediate target.In the early 1980’s dissatisfaction with M1 as an intermediate target led the Bank of Canada to monitor several monetary aggregates rather than just one.Changes in the demand for money imply that the stance of monetary policy cannot be judged only by looking at measures of the money supply. In such cases, interest rates provide additional information about monetary policy.Since the early 1990’s, the Bank has used the Monetary Conditions Index as an intermediate target. The MCI contains information which reflects the open-economy nature of Canada’s monetary transmission mechanism.Application 29-2Lags in the Conduct of Monetary PolicyMonetarists argued that monetary policy was potentially very powerful in the sense that a given change in the money supply would lead to a substantial change in the aggregate demand, whereas Keynesians were associated with the view that monetary policy was much less powerful.Application 29-3The full effects of monetary policy nevertheless occur only after quite long time lags. Execution lags, lags that occur after the decision has been made to implement the policy, can have important implications for the conduct of monetary policy.There are four reasons why monetary policy – changes in the reserves of the banking system – does not affect the economy instantly:1.Deposit creation takes time2.Switching between assets takes time3.Changes in investment takes time4.The multiplier process takes timeMonetary policy ...
