e -Brief

Much of the empirical literature on the effectiveness of QE has focused on the impact of asset purchases of bonds on interest rates in the economy and, particularly, the reduction in the upward slope of the yield curve from short to long term. [...] On the Bank of Canada’s balance sheet the purchase of government securities/private assets increases the asset side of the balance sheet, which is offset by the increase in financial institution reserves. [...] A concrete way to achieve this would be to move to target the average rate of inflation over a horizon of two or three years, which would lead to the partial correction of both undershoots and overshoots of the target.18 To ensure credibility that the overshoot will be temporary, the Bank will simultaneously have to address the implications of its massively inflated balance sheet. [...] The decision to buy up the assets in the first place would still rest solely with the Bank of Canada, but once those purchases have been made the exchange would put the federal government in charge of managing the associated credit risk, leaving the Bank to deal with only federal debt, thereby simplifying the process of achieving its inflation target.25 21 See Congdon and Petley (2020). [...] As the Bank of Canada purchased a substantial amount of assets at the onset of the pandemic, this drove up the supply of settlement balances held by commercial banks and other Canadian financial institutions, putting downward pressure on the overnight rate and driving it towards the Deposit Rate.