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Title:
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WP Number:
2022-04
Abstract:
Canada’s inflation rate rose from 3.1 percent in June 2021 to 8.1 percent one year later. Monetary policy is consequently tightening. We explore some causes and consequences of these developments. Using detailed price and quantity data, we separately identify demand-from supply-driven inflation. We find two-thirds of Canada’s accelerating inflation since Q1 2020 is supply-driven, which complicates monetary policy. Another supply shock — large increases in bank reserves — may complicate it further. We estimate that ample reserves and rising interest rates may cause large financial losses for the Bank of Canada. This creates novel reputational and communications challenges for the Bank and highlights underappreciated connections between monetary and fiscal policy. These twin supply shocks — to consumer products and overnight balances — are important aspects of Canada’s recent inflation and monetary policy experiences.
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Format: 2024/04/30
Last updated:
Format: 2024/04/30
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