Most economists view Canada, like the industrialized world, as being in the midst of a serious economic recession. For Canada, the recession started during the fourth quarter of 2008, and is expected to last at least through the first half of this year. Our country’s constant-dollar exports, domestic business investment and consumer durables spending are all expected to decline during this period.

Consequently there are calls from many quarters for the federal government to undertake an aggressive fiscal stimulus program. In turn federal government has already indicated that it will increase government spending by a fairly large amount. However, we consider such thinking misplaced. We call for a much smaller fiscal stimulus, whereby the strongest anti-recessionary measures would come through expansionary Bank of Canada policy. We make the following points:

1. Expansionary monetary policy:

We endorse the strong measures so far undertaken by the Bank of Canada. On December 9, the Bank cut its overnight interest rate target by three-fourths of a percent, to 1 ½ percent. And, as we describe in this paper, the Bank – over a four-moth period – bought up $32-billion in risky, short-term purchase-and-resale agreements (PRAs) from member banks. To finance this, the Bank has accepted an unusually large increase of $24-billion in federal government deposits. These actions represent a strong effort by the Bank and our federal government to improve Canadian bank liquidity.

2. Modest expansionary fiscal policy:

Expansionary monetary policy should help keep the value of the Canadian dollar low, and this should help stimulate exports. We, however, support only a modest expansionary fiscal policy. We encourage the Department of Finance Canada to grant a temporary, one-year investment tax credit, worth $5-billion, and available for all businesses. Businesses could apply for cash advances once agreement-to-purchases are made. Second, we support a speed-up in government investment infrastructure, where$2-billion is moved up into the 2009/10 fiscal year from future years.

3. Regular monthly government press conferences:

We support joint, monthly press conferences, run by senior government officials, giving updates on (1) the state of the economic recession, and (2) government efforts to fight the recession. Since, as we show in this paper, that the federal Department of Finance Canada and the Bank of Canada have cooperated in the extraordinary PRA purchases, we see it in the country’s interest for the two agencies to cooperate to inform the public about current economic recession. Our suggestion may seem unusual, but the troubled times call for continued reassurance from government officials.

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