SOME PEOPLE ASK WHY the Bank of Canada can't directly
increase or decrease the money supply at will,
since it regulates the supply of paper currency
in circulation.
The answer is that the bank notes issued by the Bank
represent only a small portion of all the money
circulating in the economy at any one time. The
amount of money in circulation can be measured
in a number of different ways. Some of these
different measures, which are called monetary
aggregates, are described below:
The currency (bank notes and coins) in
circulation plus personal chequing accounts
and current accounts at banks, are referred
to as M1.
A broader measure, M2, also includes personal
savings accounts and other chequing
accounts, term deposits, and non-personal
deposits requiring notice before withdrawal.
But banks are not the only providers of deposit
facilities, so an even broader measure of
money is provided. M2+ includes all deposits
at non-bank deposit-taking institutions,
money-market mutual funds, and individual
annuities at life insurance companies.
An even broader measure still, M2++, also
includes all types of mutual funds and CSBs.
Interest rates control money supply
Commercial banks and other financial
institutions provide the greater part of assets
used as money through loans made to individuals
and businesses. In that sense, financial
institutions are creating money.
The Bank of Canada manages the rate of money
growth indirectly through the influence it
exercises over short-term
interest rates. When these rates change,
they carry other interest rates — such as those
paid by consumers for loans from commercial
banks — along with them. When interest rates
rise, consumers and businesses are apt to hold
less money, to borrow less, and to pay back
existing loans. The result is a slowing in the
growth of M1 and the other broader monetary
aggregates.
Bank monitors money supply growth
Indicators such as M1 provide useful information
about changes that are occurring in the economy.
The availability of money and credit must expand
over time, and the Bank of Canada is responsible
for ensuring that the rate at which more money
is introduced into the economy is consistent
with long-term stable growth.
The bank's economic research indicates that the
growth of M1 provides useful information on the
future level of production in the economy. The
growth of the broader monetary aggregates is a
good leading indicator of the rate of inflation.
The objective of the Bank of Canada's
monetary policy is to support a level of
spending by Canadians that is consistent with
the Bank's goal of
price stability. This is defined as keeping
inflation
