Coast to Coast Seminar Series: "Central Banks Shore up their Arsenals"

Abstract

Effective monetary policy in hard economic times depends on the ability of the central bank to influence consumer behaviour through adjustments to interest rates and exchange rates. When the Bank of Canada dropped its overnight bank rate to one quarter of a percent in April 2009, observers began to worry that the bank was out of bullets. In an extraordinary move the bank issued a conditional commitment; they would keep the bank rates at that low level for at least a year. This new approach had the stimulus effect they had hopped for. Central banks in other countries, particularly in the US and the UK have not been so lucky. The financial crisis has inspired macro economists to rethink how we conduct monetary policy at the effective lower bound of interest rates. Central banks have had to shore up their arsenals, if for no other reason but to instill some public confidence in their ability to influence the economy.