xvi Contents Supply Curve 438 Equilibrium in the Market for Reserves 439 The Bank of Canada s Approach to Monetary Policy 439 How Monetary Policy Affects the Economy 440 Nominal Interest Rates and Monetary Policy 441 Open Market Operations 443 Special PRAs 443 SRAs 444 Advantages of SPRAs and SRAs 445 Settlement Balances Management 445 Receiver General Auctions 446 Swaps with the Exchange Fund Account 447 The Target Level of Settlement Balances 448 Application Monetary Control in the Channel/Corridor System 449 Monetary Policy at the Effective Lower Bound for the Overnight Rate 450 Bank of Canada Lending 452 Operation of the Standing Lending Facility 452 Inside the Central Bank Monetary Policy atTimes of Crisis 453 Lender of Last Resort 454 Discretionary Liquidity Operations 455 Inside the Central Bank Emergency Lending Assistance to Troubled Banks 456 Advantages and Disadvantages of the Bank s Lending Policy 457 Inside the Central Bank Federal Reserve Lender-of-Last-Resort Facilities During the Subprime Financial Crisis 458 Summary Key Terms Questions Quantitative Problem Web Exercises 460 460 460 461 461 CHAPTER 18 The Conduct of Monetary Policy: Strategy and Tactics 462 Learning Objectives 462 Preview 462 Monetary Targeting Strategy 462 Monetary Targeting in the United States, Canada, Japan, and Germany 463 Global The European Central Bank s Monetary Policy Strategy 465 Advantages of Monetary Targeting 466 Disadvantages of Monetary Targeting 466 Inflation Targeting 466 Inflation Targeting in New Zealand, Canada, and the United Kingdom 467 Advantages of Inflation Targeting 469 Disadvantages of Inflation Targeting 470 Monetary Policy with an Implicit Nominal Anchor 472 Advantages of the Just Do It Approach 473 Disadvantages of the Just Do It Approach 473 Inside the Central Bank Chairman Bernanke and Inflation Targeting 475 Tactics: Choosing the Policy Instrument 476 Criteria for Choosing the Policy Instrument 478 Tactics: The Taylor Rule 479 Central Banks Response to Asset-Price Bubbles: Lessons from the Subprime Crisis 481 Inside the Central Bank Bank of Canada Watching 482 Two Types of Asset-Price Bubbles 482 Should Central Banks Respond to Bubbles? 483 Should Monetary Policy Try to Prick Asset-Price Bubbles? 483 Are Other Types of Policy Responses Appropriate? 484 Bank of Canada Policy Procedures: Historical Perspective 485 The Early Years Monetary Targeting, 1975 1981 The Checklist Approach, 1982 1988 Inflation Targeting, 1989 Present From Opaqueness to Openness and Accountability Pre-emptive Strikes Against Economic Downturns and Financial Disruptions International Considerations Summary Key Terms Questions Web Exercises 485 485 487 487 489 489 490 490 491 491 492