Reciprocal Influences: A Tale of Two Central Banks on the North American Continent

Abstract

The history of the Bank of Canada and the U.S. Federal Reserve System is intertwined not only because of geographical proximity but because of the reciprocal influence in the way they have evolved their structures to conduct monetary policy. While both find their origins in financial crises, the environment in which they were embedded in the early twentieth century was quite different. Before central banking, the U.S. banking structure was decentralized and susceptible to recurrent breakdowns, thereby necessitating a lender of last resort, while the Canadian banking system was oligopolistic and highly centralized from its inception. For most of the postwar period, the Bank of Canada tended to follow policies that generally originated south of the Canadian border; but over the last quarter century the Bank of Canada has been at the forefront of policy innovations, particularly in seeking to restructure its monetary policy system along Wicksellian lines. A detailed account of these institutional changes is provided, including the recent changes that have taken place in the aftermath of the financial crisis.