THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 417

CHAPTER 15 Central Banks and the Bank of Canada 385 (also called monetary base) consists of the monetary liabilities of the central bank and, as you will see in the next chapter, is an important part of the money supply, because changes in it lead to multiple changes in the money supply Of course, lender-of-last-resort lending is closely coordinated with the two federal regulatory agencies that are set up specifically to regulate financial institutions the Office of the Superintendent of Financial Institutions Canada and the Canada Deposit Insurance Corporation.1 Moreover, such lending is done judiciously, explicitly considering the effects on other financial institutions, the money supply, and government policy The Bank of Canada also plays a central role in Canada s national payments system (to be discussed in some detail in Chapter 17) This is essentially an electronic system that clears and settles payments and transactions including securities and foreign exchange, currently handling 15 times our gross domestic product per year Although this system is operated by the Canadian Payments Association, federal legislation that came into force in 1996 gave the Bank explicit responsibility for the regulatory oversight of this system The Bank s main concern is whether problems that affect one participant in the clearing and settlement system will spread to other participants Finally, the Bank of Canada acts as the holder of deposit accounts of the federal government, the directly clearing members of the Canadian Payments Association, international organizations such as the International Monetary Fund, and other central banks As the federal government s banker, the Bank is also responsible for the government s operating accounts In this role, as you will see in Chapter 17, the Bank shifts government balances between the government s transactions account with the Bank and the government s non-transactions accounts with the banks, using twice-daily auctions of government term deposits Monetary Policy The Bank of Canada employs such tools as open market buyback operations (the purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system) and, to a lesser extent, the shifting of government balances between it and the directly clearing members of the Canadian Payments Association to implement changes in the money supply The Bank s ultimate objective is to keep inflation low The Bank has a staff of professional economists, which provides economic analysis that the Board of Directors uses in making its decisions (see the Inside the Central Bank box, Role of the Bank s Research Staff) The Bank s goal of low inflation is closely related to the goal of steady economic growth, because businesses are more likely to invest in capital equipment to increase productivity and economic growth when inflation is low Low inflation is also desirable because it protects the purchasing power of pensioners and those on fixed incomes.2 Although the Bank determines monetary policy, in the following section you will learn that the ultimate responsibility for policy rests with the government, The Office of the Superintendent of Financial Institutions Canada was created in 1987 to succeed the Department of Insurance and the Inspector General of Banks, whereas the Canada Deposit Insurance Corporation was created by an act of Parliament in 1967 to insure deposits, currently up to $100 000 per account, of member deposit-taking institutions See the Web Appendix to Chapter 15 on this book s MyEconLab (www.pearsoned.ca/myeconlab) for a discussion of the Bank of Canada s goal of price stability and the monetary policy used to achieve it