Monetary Policy, Accountability and Legitimacy: A Review of the Issues in Canada

Monetary policy in Canada is formulated and implemented in a state-directed policy network dominated by the Bank of Canada. State-directed networks embody a tension between democratic accountability and legitimacy on the one side and maintaining support from the business community on the other. This article assesses this tension in Canadian monetary policy, focussing on the relationships between the Bank of Canada and other actors. As a central bank, the Bank of Canada possesses a unique constitutional status, being tied to the government through a directive power of the minister of finance. The Bank has also developed close working relationships with financial institutions for the implementation of monetary policy. In reviewing these relationships, the article identifies problems related to the Bank's political accountability and its ability to maintain legitimacy. The article then reviews some reforms that might address these problems: making the Bank more independent, subjecting it to closer control by the minister of finance and endowing it with a council-based internal governing system.