A tale of two countries and two booms, canada and the United States in the 1920s and the 2000s: The roles of monetary and financial stability policies

Financial crises offer an important opportunity for learning lessons, deepening understanding and improving policies. In this vein, this chapter examines the experience of Canada and the United States in the run-up to the two biggest financial crises in global history, in the 1920s and 2000s, and the roles of their central banks. The central bank policy we focus on is monetary policy, but we also consider a broader set of policies that would fall under the heading of “financial stability” policy, which may not be exclusively the purview of the central bank. In this context, the goal of financial stability policy would be to limit systemic risk stemming from pro-cyclical movements in credit, leverage, and asset prices, which would render the financial system and the real economy more vulnerable to an adverse shock. Canada and the United States experienced a similar boom-bust economic cycle in the 1920s and 1930s and 2000s. Although this occurrence is perhaps not surprising given the close economic and financial relationships between the two countries, they did have very different institutional frameworks for determining monetary and financial conditions over the two periods. In the 1920s, the United States had a central bank, the Federal Reserve, that was responsible primarily for setting monetary conditions, whereas Canada was still in an era of free banking, where note issue and control of monetary conditions were primarily in the hands of the private commercial banks, although the Canadian Ministry of Finance did provide access to a lending window. In the 2000s, the Bank of Canada (BoC) followed an explicit inflation targeting rule, whereas the Federal Reserve (Fed) had a dual inflation and employment mandate. Both countries had limited micro-and macroprudential financial regulation and supervision in 1920s, which was greatly strengthened in the 1930s in the aftermath of the crisis. In contrast, in the years before the most recent crisis, Canada stepped up its financial regula