The Bank of Canada and the six principles of monetary policy implementation: lessons from post-Keynesian economics

Guillermo Matamoros

Chapter 4 in Central Banking and Monetary Policy Implementation, 2025, pp 78-95 from Edward Elgar Publishing

Abstract: This chapter examines the implementation of monetary policy in Canada by contrasting the post-Keynesian and the textbook mainstream perspectives. By analyzing the six principles of monetary policy implementation outlined by Marc Lavoie (2022), the chapter demonstrates their alignment with the Canadian context, thereby validating the post-Keynesian approach. The chapter reveals that the Bank of Canada (BoC) must operate as a price setter – setting the overnight interest rate – due to the endogenous and demand-led nature of money. It highlights the non-essential role of reserve requirements, supporting the post-Keynesian rejection of the money multiplier concept, a concept that is still implicit in Canadian mainstream textbooks. It also exhibits the relevance of the decoupling principle, in which setting interest rates is independent from the level of reserves. The effectiveness of the BoC in implementing monetary policy, even in times of crisis such as the Global Financial Crisis and the Covid pandemic, is attributed to its unique ability to influence market rates as a central participant in the payment system. This chapter confirms the centrality of post-Keynesian principles in understanding monetary policy implementation in Canada.

Keywords: Monetary policy; Central banks; Canada; Post-Keynesian; Interest rates; Payment systems (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035302796
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