Executive Summary – How the Bank of Canada Creates Money Through its Asset Purchases

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Money is created in the Canadian economy in two main ways: through private commercial bank loans or asset purchases, and through the Bank of Canada’s asset purchases. The majority of money in the economy is created by commercial banks when they extend new loans, such as mortgages. However, with the Bank of Canada’s unprecedented asset purchases to reduce the negative impacts of the COVID‑19 pandemic on the Canadian economy and to bring inflation back up to target, greater attention has been paid to the Bank of Canada’s money creation and its impact on inflation. An examination of the differences between these two methods shows that money creation through asset purchases by the Bank of Canada is essentially an internal government process, mostly limited by inflation. The examination concludes that external factors, like financial market dysfunction, cannot cause the federal government to run out of money.

“The process by which money is created is so simple that the mind is repelled.”
– John Kenneth Galbraith

Read the full text of the HillStudy: How the Bank of Canada Creates Money Through its Asset Purchases

Author: Brett Stuckey, Library of Parliament

Categories: Economics and finance, Executive summary

Tags: , , , ,

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