THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 494

CHAPTER 18 The Conduct of Monetary Policy: Strategy and Tactics LE A RNI NG OB J ECTI VES After studying this chapter you should be able to assess the different types of monetary policy strategy list the advantages and disadvantages of inflation targeting specify the role of a nominal anchor in the conduct of monetary policy outline Bank of Canada policy procedures from a historical perspective PRE VI EW Getting monetary policy right is crucial to the health of the economy Overly expansionary monetary policy leads to high inflation, which decreases the efficiency of the economy and hampers economic growth Monetary policy that is too tight can produce serious recessions in which output falls and unemployment rises It can also lead to deflation, a fall in the price level, such as occurred in the United States during the Great Depression and in Japan more recently As we saw in Chapter 9, deflation can be especially damaging to an economy, because it promotes financial instability and can trigger financial crises Now that we understand the tools that central banks such as the Bank of Canada use to conduct monetary policy, we can consider how central banks should conduct monetary policy To explore this subject, we first examine three monetary policy strategies, all of which focus on price stability as the primary, long-run goal of monetary policy We then look at tactics, that is, the choice and setting of the monetary policy instrument in use After examining the strategies and tactics, we can evaluate the Bank of Canada s conduct of monetary policy in the past, with the hope that it will give us some clues to where monetary policy may head in the future MO NE TARY TARGE T IN G STRAT EG Y In pursuing a strategy of monetary targeting, the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a monetary aggregate, such as a 5% growth rate of M1+ or a 6% growth rate of M2+ The central bank then is accountable for hitting the target 462