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Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?

Author

Listed:
  • Toni Gravelle
  • Ron Morrow
  • Jonathan Witmer

Abstract

At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. This decision was informed by the analysis and assessment of the two frameworks in this paper. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework. Our evaluation includes a discussion of how these relative merits have changed since the pandemic began. Specifically, we examine the evolving regulatory landscape, changes in payment systems, and the Bank's quantitative easing program to understand their implications for the relative strengths of the two frameworks for monetary policy implementation.

Suggested Citation

  • Toni Gravelle & Ron Morrow & Jonathan Witmer, 2023. "Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?," Discussion Papers 2023-10, Bank of Canada.
    • Handle: RePEc:bca:bocadp:23-10
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    References listed on IDEAS

    as
    1. Williamson, Stephen D., 2019. "Interest on reserves, interbank lending, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 14-30.
    2. Beckworth, David, 2018. "The Great Divorce: The Federal Reserve’s Move to a Floor System and the Implications for Bank Portfolios," Annals of Computational Economics, George Mason University, Mercatus Center, November.
    3. Joseph E. Gagnon & Brian Sack, 2014. "Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed," Policy Briefs PB14-4, Peterson Institute for International Economics.
    4. Nellie Zhang, 2012. "Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System," Staff Working Papers 12-15, Bank of Canada.
    5. Todd Keister & Antoine Martin & James J. McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 41-56.
    6. Walter Engert & Toni Gravelle & Donna Howard, 2008. "The Implementation of Monetary Policy in Canada," Discussion Papers 08-9, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Market structure and pricing; Monetary policy implementation; Payment clearing and settlement systems;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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