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1. The most interesting thing I learned about this topic is the fact that the target inflation rate is studied as if it is a science of money, and there are so many factors that apply to the function of Monetary Policy. I also found it very interesting to learn about the advancement of technology and how digital currencies essentially decrease our dollar rate over time.
2. A real life example would be the policy being implemented in the 2008 Financial Crisis, and also during the Corona Pandemic that we are going through during 2020.
3. If I could pass on knowledge to any family/friend, I would let them know to watch the rate of interest, to determine the best times to invest.

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This image provides a graph for the targeted overnight rate in Canada, since the 2000-2020.
Depending on the given circumstances in the economy, the overnight rate is adjusted to influence financial institutions to borrow/lend and in turn, encourage firms and households to spend.
The overnight rate has declined in 2009 (post '08 financial crisis), and also in 2020, (the pandemic), as the decline of interest rates influences spending and boost the economy into recovery.

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This image is a chart of how Monetary Policy functions.
Inflation causes two types of uncertainty, one which can be indicated by the pink balloons, which provides that linkage between the macroeconomic variables.
The second type of uncertainty is shown in the yellow indicators that provide uncertainty about current and future developments.

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This graph provides a comparison of the inflation rate in Canada and the US. As you can see the inflation rate decreased drastically in Canada in the beginning of the pandemic.
Its also interesting to see that there was a immediate response in the inflation rate; although statistics show that it takes at least a year to be observed.

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This image is a graph stating the annual inflation rate provided in 2020, and portrays the downfall that occurred in regard to inflation through the cause of the Corona Pandemic.
It shows that there was a maintenance to keep the inflation rate between two points on the graph, which was not obtainable when the first wave abruptly occurred, as there was excessive uncertainty.

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This website gives insight into the Canadian Markets, and the Methodology that Monetary Policy provides.

The Bank of Canada's main tool is the target of the overnight rate to conduct monetary policy. This informs major financial institutions the average and ideal interest rates that the Bank of Canada wants to observe within the marketplace where money is lent at overnight rates.
Changing the Overnight rate essentially changes the interest rates of mortgages and prime rates offered by local banks.

In order to cover their transactions within the day, major financial institutions consistently borrow and lend money overnight. At the end of the day, there may be financial institutions with extra money, and some who need money; therefore, the score needs to settled by trading funds to allow all transactions to be covered amongst all financial institutions.
If the market rate is moving away from the Target, the Bank is able to intervene the overnight market by adjusting the target rate to set the trend. When the Overnight rate is changed, it communicates which direction it wants short-term rates to end up. This change, correlates to the change of prime rates and indirectly affect mortgage rates/interest paid to consumers within savings or assets.

Interest rates go down to encourage firms and households to spend more in order to contribute to boosting the economy; however, inflation occurs when the economy grows abruptly, and interest rates need to be increased to slow down inflation and lending/borrowing rates.

This website provided an interesting insight into the methodology of Monetary Policy, as it provides the different aspects of the market, and how banks are able to determine what the overnight rate should be, and how the change/adjustment of the overnight rate has a direct/indirect correlation to the interest rates offered at commercial banks.

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Interbank overnight market

THE TARGET FOR THE OVERNIGHT RATE is the main tool used by the Bank of Canada to conduct monetary policy. It tells major financial institutions the average interest rate the Bank of Canada wants to see in the marketplace where they lend each other money for one day, or "overnight." When the Bank changes the Target for the Overnight Rate, this change usually affects other interest rates, including mortgage rates and prime rates charged by commercial banks.

Canada's major financial institutions routinely borrow and lend money among themselves overnight, in order to cover their transactions during the day. Through the Large Value Transfer System (LVTS), these institutions conduct large transactions with each other electronically. At the end of the day, the financial institutions need to settle with each other. One bank may have funds left over at the end of this process, while another bank may need money. The trading in funds that allows all the institutions to cover their transactions is called the overnight market. The interest rate charged on those loans is called the overnight rate.

The Bank of Canada operates a system to make sure trading in the overnight market stays within its "operating band." This band, which is one-half of a percentage point wide, always has the Target for the Overnight Rate at its center. For example, if the operating band is 4.25 to 4.75 per cent, the Target for the Overnight Rate would be 4.50 per cent. Since the institutions know that the Bank of Canada will always lend them money at the rate at the top of the band, and pay interest on deposits at the bottom, there is no reason for them to trade funds at rates outside the band.

The Bank can also intervene in the overnight market at the Target rate, if the market rate is moving away from the Target. The Target sets the trend. When the Bank changes the Target for the Overnight Rate, this sends a clear signal about the direction in which it wants short-term interest rates to go. These changes usually lead to moves in the prime rate at commercial banks, which serves as a benchmark for many of their loans. These changes can also indirectly affect mortgage rates, and the interest paid to consumers on bank accounts, GICs, and other savings.

When interest rates go down, people and businesses are encouraged to borrow and spend more, boosting the economy. But if the economy grows too fast, it can lead to inflation. The Bank may then raise interest rates to slow down borrowing and spending, putting a brake on inflation. In choosing a Target for the Overnight Rate, the Bank of Canada picks a level that it feels will keep future inflation low, stable and predictable. Keeping inflation low and stable helps provide a good climate for sustainable economic growth, investment and job creation.

The data for the 10-year rate refers to the par yield rates. "Long term (in most cases 10 year) government bonds are the instrument whose yield is used as the representative 'interest rate' for this area. Generally the yield is calculated at the pre-tax level and before deductions for brokerage costs and commissions and is derived from the relationship between the present market value of the bond and that at maturity, taking into account also interest payments paid through to maturity." (https://stats.oecd.org/index.aspx?queryid=86).

International comparability

When comparing Canada's official interest rates with those of other countries, the Target for the Overnight Rate is the best rate to use. It is directly comparable with the U.S. Federal Reserve's target for the federal funds rate, the Bank of England's two-week "repo rate," and the minimum bid rate for refinancing operations (the repo rate) at the European Central Bank.

CORRA

The Canadian overnight repo rate (CORRA) is the weighted average rate of overnight general (non-specific) collateral repo trades that occurred through designated inter-dealer brokers and the Canadian Derivatives Clearing Corporation's central counterparty system between 6:00 a.m. and 4:00 p.m. on the specified date as reported to the Bank of Canada. The list of contributors, as recognized by the Investment Industry Association of Canada (IIAC), includes Freedom International Brokerage Inc., Tullett Prebon (Canada) Ltd. and Shorcan Brokers Ltd. Although the data is believed to be reliable, the Bank of Canada does not guarantee its accuracy or completeness. As approved by the IIAC, in the event that less than $500 million in eligible overnight trades are reported, CORRA will be set at the Bank of Canada's target for the overnight rate.

Effective 15 June, 2020, the Bank of Canada has replaced Refinitiv as the administrator of CORRA. Concurrent with this change, the Bank of Canada adopted a new methodology for calculating CORRA. Historical data has not been revised, however, the data exhibits a break in methodology at 12 June 2020.

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Canada Monetary Policy Rate | Moody's Analytics

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THE TARGET FOR THE OVERNIGHT RATE is the main tool used by the Bank of Canada to conduct monetary policy. It tells major financial institutions the average interest rate the Bank of Canada wants to see in the marketplace where they lend each other money for one day, or "overnight."

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Video One: Monetary Policy explained by the Federal Gov. 

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Video One: Monetary Policy explained by the Federal Gov. 

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This Video Provides that a Good Monetary Policy provides good price stability and high employment.
It gives an insight into the Federal Reserve, specifying facts such as the Fed. Reserve can lend money against banks' good assets and prevent panic and disruption in the economy.
It was a very deep insight presented in a practical way, as it touches the bases of each factor of the monetary policy without a long lecture.

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Video Three: How Bitcoin changed Monetary Policy

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Video Three: How Bitcoin changed Monetary Policy

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This Video provides the insight into the Change of money, and how digital currencies have affected our dollar. It specifies that monetary policy almost ceases to exist as raising the interest rates is extremely difficult given the competitive market that is now available. It talks about the Federal Reserves credibility,  how building assets may decrease the value of the dollar, and lending rates.
It talks about the upgrade of technology and how this can change monetary policy to fiscal policy, as it allows direct access to cash from central banks.
It was very interesting to learn how digital currency is evolving and impacting our economic system, and how this can change the function of the federal reserve and central banks overtime .

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Raoul Pal: How Bitcoin Can Change Monetary Policy FOREVER

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Video Two: Crash Course into Monetary Policy 

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Video Two: Crash Course into Monetary Policy 

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This Video is a crash course on monetary policy. It differs from the other video as it focuses on the federal reserve but describes what the reserve does and also touches all the bases of monetary policy without overlapping the information provided in the last video. It talks about money supply and the reasons why this fluctuates, expansionary monetary policy, and contractionary monetary policy supply. It was a very practical way to view monetary policy while recognizing the subject in its complexity.

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What's all the Yellen About? Monetary Policy and the Federal Reserve: Crash Course Economics #10

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Welcome, this is a simply outlined, yet insightful Padlet based on the Bank of Canada's Monetary Policy.
This policy is directly related to our money supply, interest rates, and inflation, in which needs to be maintained to allow the economy to thrive.

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Video Four: Monetary Policy Report: October 2020. 

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Video Four: Monetary Policy Report: October 2020. 

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This is a very short yet interesting video in regards to the Report that was published as a result of Monetary Policy being implemented due to Covid-19.
It provides that the recovery of the Economy will be slow and a bit unstable at times, but in order to support recovery the Bank will continue to buy bonds to lower the cost of borrowing for Canadians. It provides that the target inflation rate is not where its suppose to be and therefore interest rates will remain low until it reaches 2%. It states that the expected recovery of the inflation target rate will be achieved in 3 years.
It is interesting to see the simplified and practical insight into the recovery of our economy, what steps are being taken and when we are expected to arrive at our goal in our economy.

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The Bank expects Canada's economy to grow by almost 4 percent on average in 2021 and 2022, following a decline of about 5 ½ percent in 2020.

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This website gives insight into the Monetary policy, what it is, why it matters, and why it is important to target inflation.

The monetary policy maintains confidence in the value of money, providing stability in the general level of prices. It is a strategy that allows adjustment to short-term interest rates to achieve a growth rate of output, and maintain a low and stable inflation rate.
The bank lends funds to each other for very short periods at overnight interest rates; furthermore, they are willing to extend loans to banks at a rate above the targeted overnight rate, and will pay interest on any deposits that is accepted from banks - but below the targeted overnight rate. This allows a higher lending rate and lower deposit rate, providing the maintenance of a targeted overnight rate.

Central Banks focus on the control of inflation for two reasons:
1) Evidence and theory suggest that Monetary Policy can only have systematic and efficient macroeconomic variables on inflation.
2) Inflation is damaging to the economy, due to the uncertainty it generates. A low and stable provides the best economic environment for firms, workers, and consumers to prosper.

Inflation is directly correlated to uncertainty, both for relative prices and the path of inflation itself. This leads firms and households to make decisions that wouldn't be likely in a certain and low-inflation economy.
Prices are determined by the interaction of buyers and sellers, this market price transmits information and guides the allocation of economic resources.
With the presence of inflation and uncertainty, prices can no longer convey the information clearly, as the result of market out-comes lack efficiency that would be achieved in a non-inflationary world.

This website was informative based on why inflation is the focus of monetary policy and how this relates to prices in our daily lives within firms/households. I chose this website because I felt it was necessary to provide why Monetary Policy matters and why it is extremely crucial for the Economy to maintain a low and stable inflation rate.

If the link below is not working please refer to this as I had technical difficulties
https://www.mcgill.ca/economics/files/economics/why_monetary_policy_matters_-_a_canadian_perspective_abridged_version.pdf

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This website also provided by the Bank of Canada, gives insight into how Monetary Policy Works and What it takes to implement such a policy within the Economy.

The commitment of the Bank of Canada to keep the inflation rate ideally at 2%, the midpoint the target range. This commitment influences firms and households expectation rates.
These expectations rates are provided by the credibility of the Bank of Canada, who aims to keep inflation expectations 'anchored'.
Monetary Policy has a transmission system, essentially a complex chain of cause and effects that are a result of Canadas economic decisions. Ex: changes in asset prices, aggregate demand, output gap and eventually inflation.

Overnight interest rates are adjusted; two responses occur.
1) Increase in overnight interest rate = increase in long-term interest rates.
2) Increase in interest rates = increase in financial capital flowing into Canada for higher yields. - ex. less export, more import.
This allows an easy adjustment within change of quantities, specifically investments, and net exports.

Monetary policy is a long-term strategy, meaning that it can take months for change in aggravated output to be observed. Current estimates show that the effect on inflation is not apparent until 12-18 months later.

Prior to being implemented, the Bank of Canada  conducts extensive economic research; theoretical and empirical, to measure out the uncertainties that come with long-term strategies.

This website was informative in regard to correlation between time and aggravated output. It was interesting to read that although changes may be observed in reality (ie: cerb), the interest rates and actual output cannot be observed until almost a year later.

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At the heart of the Bank's monetary policy is a commitment to maintain low and relatively stable inflation-in particular, to keep the rate of inflation close to the 2 per cent midpoint of the 1 to 3 per cent target range. The Bank's commitment is essential for influencing firms' and households' expectations of inflation. Faced with a shock that threatens to push inflation either above or below the inflation target, Canadian firms and households are confident that the Bank will act to bring inflation back to the 2 per cent target. This confidence in the Bank's policies is a result of the Bank's past record of doing what it claimed it would do-keep inflation low and stable.

When the Bank of Canada has clearly stated objectives and takes policy actions that affirm those objectives, the result is an increase in its credibility. This credibility, in turn, helps to keep expectations of future inflation close to the inflation target-what is sometimes called an anchoring of inflation expectations. The importance of well-anchored inflation expectations is best illustrated by recalling what happens when such anchoring is not present, as in the 1970s and 1980s. During those years, the inflation-control process was difficult because economic shocks led to adjustments in expectations which, in turn, led to behaviour that influenced actual inflation. An important lesson learned since the early 1990s, in Canada and elsewhere, is that keeping inflation expectations well anchored is an important part of keeping actual inflation low and relatively stable.

With these comments as background, it is now possible to examine a simple analytical framework illustrating how the policy actions of the central bank influence many macroeconomic variables and, ultimately, help to keep inflation low and relatively stable.

4.1 The transmission mechanism of monetary policy

The transmission mechanism is the complex chain of cause and effect that runs from the Bank of Canada's actions to changes in asset prices, aggregate demand, the output gap and, eventually, inflation. Among economists, there is some debate about the nature of the transmission mechanism. Engert and Selody (1998), for example, emphasize the important distinction between the "passive-money" and "active-money" views of the transmission mechanism and argue that the possibility of making policy errors can be reduced by paying attention to both views. 1 Even among those who agree on the broad nature of the mechanism, there is recognition of considerable uncertainty regarding the timing and quantitative importance of specific linkages. A collection of speeches and research papers published by the Bank of Canada (1996) provides a mainstream view of the transmission mechanism. 2 Chart 6 is a simplified illustration of the transmission mechanism. The dotted line in the chart shows how the Bank's policy commitment, and thus its acquired credibility, helps to anchor firms' and households' expectations of future inflation.

The transmission mechanism is best understood by tracing through the effects of a hypothetical policy decision. For example, consider a situation akin to that in the autumn of 2004, when the Bank had good reason to expect that the solid economic recovery occurring both in Canada and in the global economy would create pressures for Canadian inflation to rise over the coming months. In this case, the Bank's policy response was to raise its target for the overnight interest rate. How does such a policy action help to contain inflationary pressures?

Following the announcement of the Bank's policy action to increase its target for the overnight rate, the actual overnight interest rate adjusts almost instantly. As the overnight interest rate rises, two responses are observed. First, the hike in the overnight rate leads to an increase in longer-term interest rates in Canada. This increase occurs because there is an entire spectrum of financial assets, ranging from overnight loans to 30-year bonds, and their rates tend to move together. The second response is that, as Canadian interest rates rise, financial capital from around the world flows into Canada in pursuit of higher yields. This capital inflow leads to an appreciation of the Canadian dollar. At this point, the stage is set for a change in quantities, specifically investment, and net exports.

The rise in longer-term interest rates increases the cost of borrowing and thus tends to dampen the demand for interest-sensitive expenditures. In particular, the rise in interest rates will reduce the growth rate in firms' demand for investment goods and households' demand for residential housing and other big-ticket items such as automobiles, furniture, and appliances. The appreciation of the Canadian dollar increases the prices of Canadian products relative to foreign ones and thus leads to adjustments in spending. Specifically, the demand by foreign consumers for Canadian products will be dampened, and the demand by Canadian consumers for foreign products will be stimulated. The growth of Canadian exports will decline, and the growth of imports from abroad will increase-a decline in the growth of Canadian net exports. Taken together, the reduced growth rates of household consumption, firms' investment demand, and net exports imply a reduction in the growth rate of Canadian aggregate demand. 3

Over short periods of time, perhaps up to a few years, output in the economy is determined by the level of demand for all of the goods and services produced in Canada-that is, output is determined by aggregate demand. With aggregate demand now growing more slowly than before the Bank's policy action, there will soon follow a slowing of the growth rate of actual output. With some given underlying growth rate of potential output, this reduction in the growth rate of actual output implies the opening (or enlarging) of a "negative" output gap, in which actual output is less than potential output.

The final step in the transmission mechanism is the link from the output gap to the rate of inflation. The output gap is a convenient measure of the amount of excess demand or excess supply in the aggregate economy. With actual output below potential output, firms are producing below their capacity. This situation of excess supply can continue for a while, but eventually, the economic slack leads to a reduction in the growth rate of wages and the prices of other inputs. This reduction in the growth of firms' costs then leads them to be less aggressive in increasing their prices, and inflationary pressures subside.

4.2 Time and uncertainty

Thus, we see how the Bank of Canada's action to raise its target for the overnight interest rate sets in motion a complicated sequence of cause and effect that helps to keep inflation from rising above its target. 4 But how much time elapses between the Bank's policy action and the other effects, especially the final effect on the rate of inflation?

Economists usually think of the transmission mechanism as containing "long and variable lags," indicating not only that central bankers must be patient while waiting for the results of their policy actions, but also that they must be prepared to accept a few surprises while they're waiting. The workings of the economy are sufficiently complex, and our understanding of the economy sufficiently incomplete, that the various lags in the process may turn out to be either longer or shorter than initially expected.

The Bank of Canada's policy actions relating to the overnight interest rate have almost immediate effects on the exchange rate and interest rates, but current estimates suggest that it takes between 12 and 18 months for most of the effect on aggregate output to be observed. Most of the effect on inflation is not apparent for between 18 and 24 months (Duguay 1994). And even these estimates are subject to considerable variation.

The time lags inherent in the transmission mechanism make it difficult to conduct monetary policy. In particular, these long time lags mean that central banks must be forward-looking in their policy decisions. Consider two examples to illustrate the point. If, on 1 January 2005, the Bank of Canada observes an event in the world economy that is likely to reduce aggregate demand beginning in June of the same year, there is nothing the Bank can do in January to fully offset that shock. Even if it responded immediately and lowered its policy rate in early January, there simply would not be enough time for its policy to stimulate aggregate demand sufficiently to offset the effects of the shock by June.

This example illustrates why the Bank places more emphasis on long-lasting shocks than on shocks believed to be short lived: monetary policy takes so long to work that it makes little sense to respond to shocks that will have disappeared by the time the policy takes effect. A related difficulty, however, is that it may take the Bank a few months to fully determine the nature of the shock, as well as its likely duration. Thus, a forward-looking central bank must do its best to anticipate what events are likely to occur in the future.

A second example is more familiar in recent Canadian experience. Suppose the current rate of inflation is low, but that economic developments expected to occur in the near future will create an undesirable increase in future inflation. In such a situation, a central bank that recognizes the importance of the long lags in the transmission mechanism will increase its policy interest rate now even though current data suggest that there is no inflation problem. This example illustrates why vigilant central bankers are often accused of fighting demons that are not present. The problem is that if central bankers delay their policy response until inflation actually appears in the data, it would be too late to have the desired impact. Being forward-looking means anticipating where the demons will surface and acting in a pre-emptive manner. Although a central bank that is successful in anticipating future inflationary pressures, and also in taking the appropriate actions to prevent their full realization, can easily be accused of seeing dangers that are not genuine, the truth may be that the dangers were avoided only because of the central bank's vigilance.

Although many central bankers may do a good job of predicting future events, no central bank has a crystal ball-the future is only clearly visible once you are there. Indeed, it is actually worse than this in economics. Because of imperfect information that is often revised, even several months after the fact, economists have a difficult time knowing with precision what is happening in the current quarter until they are two or more quarters down the road. This mention of imperfect information leads us to discuss the informational requirements for monetary policy. In a nutshell, the successful conduct of monetary policy requires good information, and plenty of it.

4.3 Monetary policy faces two types of uncertainty

In order to understand the informational requirements for monetary policy, it is helpful to reconsider the nature of the transmission mechanism. Chart 7 shows the transmission mechanism again, but adds two types of uncertainty. The first type involves uncertainty about the details in the transmission mechanism itself; that is, uncertainty about the precise nature of the linkages between key macroeconomic variables. This uncertainty is shown by the pink numbered balloons. The second type is uncertainty about current and future economic developments in the domestic and world economies, as shown by the yellow starbursts.

Six instances of the first kind of uncertainty are shown in Chart 7, each referring to a different aspect of the transmission mechanism. The nature of the uncertainty in each case is as follows:

1. Term structure. How do the Bank's changes in the target overnight interest rate lead to changes in longer-term interest rates? Are the changes always in the same direction? What magnitude of changes are observed for longer-term interest rates?
2. Foreign exchange market. How do the Bank's changes in the target overnight interest rate lead to changes in the exchange rate? How big a change in the exchange rate typically follows a change in the policy rate by the Bank of Canada?

3. Interest sensitivity of spending. How much, and over what timeframe, do aggregate consumption and investment respond to changes in longer-term interest rates? Do different components of consumption and investment have different responses to changes in interest rates?
4. Sensitivity of net exports. How much do exports respond to a change in the exchange rate, and with what time lags? How quickly and in what magnitude do imports respond to the same change in the exchange rate?
5. The multiplier. How big is the "multiplier" that connects initial changes in aggregate demand to the overall change in aggregate output? Over what time period are the full effects on aggregate output observed? 5
6. Excess demand or supply. How quickly does the excess demand or supply associated with any given output gap cause changes in the growth rate of wages and the prices of other inputs? How quickly do these changes show up in inflation?

Eight examples of the second type of uncertainty are shown in Chart 7, with the yellow starbursts each referring to a different kind of shock that can affect the economy. A brief description of each is as follows:

A. Portfolio adjustments. For several reasons, creditors may decide to adjust their holdings of short-term and long-term Canadian securities, leading to changes in Canadian interest rates.
B. Foreign exchange market. Changes in exchange rates occur daily and for many reasons, including changes in the growth of the global economy, changes in world commodity prices, and changes in international asset portfolios.
C. Consumption and investment. Households change their spending, and firms change their investment plans, often in unpredictable ways. Expectations regarding future economic conditions are important.
D. Government expenditures. Canadian governments (federal, provincial, territorial, and municipal) change their spending on an annual basis, sometimes in unexpected ways.
E. Net exports. Changes in foreign income lead to changes in the demand for Canadian exports. The rise of specific countries in the production of certain goods frequently leads to changes in world demand, either away from or towards Canadian goods.
F. Potential output. The economy's production capacity is not directly observable, and therefore must be estimated. Its growth depends on labour-force growth, the accumulation of physical and human capital, and the growth of productivity. Changes in potential output often cannot be detected until well after the fact.
G. Inflation expectations. Large and sudden changes in the prices of specific products frequently lead to changes in inflation expectations. However, the central bank's commitment and credibility help to anchor expectations in the face of such shocks.
H. Inflation shocks. The rate of inflation is regularly affected by changes in indirect taxes, sharp changes in the prices of specific products, and by changes in the exchange rate that alter the Canadian-dollar prices of imported products. Not every change in measured inflation is caused by excess demand or supply in the Canadian economy. 6

This collection of uncertainties-about the economic linkages and the economic events-is crucial to the conduct of monetary policy, not least because of the long and variable lags that we discussed earlier. For the Bank of Canada to set its policy interest rate now in order to keep inflation within its target range in the future, it is necessary for the Bank to anticipate the likely changes in the economy that will occur over the next two years. It is also necessary for the Bank to anticipate how its actions will be transmitted through the economy. Since no central bank has the ability to foretell the future or has perfect knowledge of the various linkages in the economy, this is a difficult task. But knowledge of the transmission mechanism, simplified as it is in Chart 7, permits the Bank to be systematic about which questions it asks, and to be analytical about interpreting some of the answers.

This discussion underscores why monetary policy is best viewed as a problem of policy-making under uncertainty. Faced with such uncertainty, the Bank needs to be forward-looking, aware of many possible shocks that may occur in the near future. It must also be aware that economic developments shown to be present by current data may not persist for long, or may in the near future be revealed, through a revision of the data, never to have existed at all. 7 Thus, the Bank is forced to perform a precarious balancing act-sometimes taking action in anticipation of what is likely to happen while at other times waiting to see what new data are confirmed as genuine. Not surprisingly, good judgment based on considerable experience is an essential part of good monetary policy.

4.4 Good information, and plenty of it

In addition to judgment and experience, consider what the Bank of Canada-and any other central bank-requires in order to conduct the best possible monetary policy in the face of uncertainty.

The Role of Research

To deal with the uncertainty regarding the various linkages between macroeconomic variables (the pink balloons in Chart 7), the Bank needs to conduct a significant amount of economic research, both theoretical and empirical, and to subject the results of this research to ongoing testing. The nature of modern economies is such that this job will never be finished, and the complete set of answers will never be known. For example, even if the collection of economic researchers were able to estimate the precise relationship between changes in longer-term interest rates and firms' planned investment spending, there is no reason to believe this relationship will be stable over time, or that factors that proved to be important in the past will remain of central importance in the future. Economic relationships depend in important ways on human behaviour, which itself depends on the specifics of time, place, and circumstance.

In short, the economic relationships that are central to the conduct of monetary policy are difficult to pin down and are constantly changing. This simple fact requires the Bank to be continuously conducting research on the nature of the transmission mechanism. To do otherwise would be to abrogate its central responsibility.

The Importance of Current Analysis

Dealing with the uncertain developments in the domestic and world economies (the yellow starbursts in Chart 7) requires information of a different kind. In order to know what events are occurring, and what events are likely to occur in the near future, the Bank needs to collect and analyze a great deal of current data-a process that is often called current analysis. Although the relatively small number of yellow starbursts in Chart 7 may suggest that the required effort in this direction is commensurately small, this suggestion would be misleading. In fact, the large quantities of variables that feed into each yellow starburst, and the inherent complexity involved in understanding each individual variable, mean that the task of current analysis for any central bank is Herculean. Thus, a great many people at the Bank are assigned the task of collecting and analyzing data on hundreds of variables, from employment and exports to commodity prices and housing starts, from government spending and exchange rate regimes to domestic steel production and foreign crop failures. Only when the various shocks to the economy are observed and understood can the Bank hope to incorporate that information fruitfully into its overall decision-making.

A relatively new and important example of data collection and analysis that the Bank carries out in an attempt to better understand the emerging trends in the economy is the Business Outlook Survey (BOS). Four times a year the Bank's regional offices survey approximately 100 firms, the overall sample chosen to be roughly representative of the Canadian economy. A number of issues are explored, including the firms' views on likely future demand for their own products, capacity pressures in their specific sectors, any emerging labour shortages, and the firms' own plans for hiring or expansion. By analyzing these data carefully, the Bank is able to better understand how Canadian firms respond to the various shocks affecting the Canadian economy.

Economic Projections

Economic research and current analysis are not independent activities. In order to conduct thorough empirical economic research, knowledge of the data is essential, and such knowledge typically comes from experience in current analysis. Conversely, the ability to interpret current data-what is going on and why?-requires a thorough knowledge of economic relationships that comes from experience in research. This ongoing interaction between research and current analysis explains why many economists at the Bank of Canada are in positions that require a regular transition between current analysis duties and research projects.

The best example of how the insights gleaned from economic research are combined with the knowledge embodied in current analysis is in the Bank's regular projection, or forecasting, exercise, based on its large and complex statistical model of the Canadian economy, the Quarterly Projection Model (QPM). Embodying the knowledge of economic relationships gained from many years of research, QPM is a mathematical representation of the interaction of the various agents in the Canadian economy-households, firms, and governments-and shows how these relationships must evolve over time to be consistent with the underlying assumptions of agents' behaviour. The model then incorporates past and current data from the Canadian and world economies and projects the most likely future path of Canadian macroeconomic variables-including output, employment, wages, and prices.

The world rarely turns out as the model projects, for two reasons. First, the model itself, though extremely complex, is nonetheless a highly simplified description of the real economy. It lacks the remarkable and changing complexity that actually characterizes any modern economy. Second, the data that are fed into the model, as good as they are, are also imperfect, and the Bank's best predictions regarding what is actually happening in the Canadian and world economies may well turn out to be wrong in some way. Nonetheless, the economic projection provides the Bank with a logically consistent and well-articulated starting point regarding the future evolution of the Canadian economy, as well as a starting point for analyzing the likely future impact of its policy actions.

These three exercises in information creation-research, current analysis, and economic projections-are imperfect and, necessarily, ongoing. Research will never be entirely "correct" and thus will never be complete. Current analysis, by its very nature, must be an ongoing process, with constant effort expended to improve data definitions and accuracy. And the art of model building and producing sensible and consistent macroeconomic projections is, perhaps unbelievably, still in its infancy. Such failings, however, in no way suggest that these activities can be forsaken. It would be impossible to conduct prudent monetary policy without the creation and provision of such information, and it is thus not surprising that central banks the world over invest considerable resources in these three key activities.

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Monetary Policy: How It Works, and What It Takes

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At the heart of the Bank's monetary policy is a commitment to maintain low and relatively stable inflation-in particular, to keep the rate of inflation close to the 2 per cent midpoint of the 1 to 3 per cent target range. The Bank's commitment is essential for influencing firms' and households' expectations of inflation.

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This website provided by the Bank of Canada, gives an insight into the objective of Monetary Policy and the two main factors that are used to implement it; inflation-control target & flexible exchange rate.

Monetary Policy is an Economic strategy provided by the Bank of Canada that is used to preserve the value of money by maintaining inflation rates between 1-3%. The idea is to keep the rates low, stable and predictable.
The Macroeconomic objective is to encourage Canadians to spend money comfortably; encourage long-term investments; and contribute to the increase of employment and productivity within the Economy.

Inflation Control Target:
Target is to keep inflation rate between 1-3%. Helps establish appropriate interest rates, for the purpose of maintaining a stable price environment.
Purposes overnight rates for loans between financial institutions; this rate serves at a benchmark for institutions to set interest rates for forms of lending such as consumer loans and mortgages.
Also purposes Short-Term interest rates to achieve inflation target.
Rates are raised to prevent the price environment from inflating above 3%, by discouraging spending and borrowing.
Rates are lowered to prevent inflation rate falling below 1%, by encouraging spending through forms of loans to stimulate the economy.

Canadas Flexible Exchange Rate:
Referred to as "floating dollar", allows an independent monetary policy more suitable to Economic circumstances within Canada. Its objective is to  achieve the inflation target.
Shifts in the exchange rate provides a "buffer", allowing Canada's Economy to easily adapt and overcome external and internal shocks.

This website was very informative in regard to what Monetary Policy is, and what its purposeful objective to the economy is. It was very interesting to learn that Canada has built its economy to adapt to changes, providing a "buffer" in necessary times.

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Learn about the objective of Canada's monetary policy and the main instruments used to implement it: the inflation-control target and the flexible exchange rate. See also how monetary policy works, how decisions are made and read related backgrounders.