The Roles of Monetary Policy and Central Banking in Macroeconomics Stabilization: The Canadian Experience

Abstract

This thesis examines the impact of Bank of Canada (BoC) monetary policy on the most critical macroeconomic variables, i.e., inflation, GDP growth, unemployment, and exchange rates over the period 2000-2024. The thesis compares the performance of the inflation-targeting regime in Canada in maintaining inflation between 1% and 3%, with the midpoint target of 2%. By the Hedge regression approach, inflation drivers are identified to be exchange rate volatility (ERV) and interest rates (ITR) because model [ITR, ERV] can explain 45.6% inflation variation. Money supply growth (MSG) is, however, less explanatory due to multicollinearity with ERV. Evidence supports the success of the BoC in anchoring inflation, but shows respect for room for restraint, when addressing structural economic problems such as housing market imbalances and issues of financial stability. The paper also contrasts off-the-run monetary policies (i.e., quantitative easing and forward guidance) during times of crisis (e.g., the 2008 financial crisis and the COVID-19 pandemic), comparing their efficacy in the short term, as well as possible negative impacts over the long run, including asset bubbles and household debt buildup. The primary recommendations are transparency in forward guidance, macroprudential regulation with priority, and synchronization of fiscal policy to target structural economic problems. Experiments with non-conventional monetary arrangements, such as the nominal GDP targeting approach, and an association between climate-related financial risks and stability matters have been recommended by the thesis. Advanced econometric methods, regional data, and comparison across studies of different inflation-targeting arrangements are the future research requirements for policy design enhancement under the new economic order.