- term economic pain. but the phrase “ shortterm pain for long - term gain ” is more than just a cliche. canada is now reaping the economic benefits of that effort. in the face of all the negative shocks that hit the global economy in the past two or three years — war, terrorism, corporate governance and accounting concerns, and the collapse of the technology sector — our economy has proven resilient. with all of the uncertainty in the global economy, it is more important than ever that national authorities around the world stick to a sound economic policy framework. it is only by staying the course that we can establish a steady base for sustained economic growth over the longer term. i don ’ t want to leave the impression that the way canada has implemented the oecd policy consensus is the only way to go. nor do i want to suggest that we have achieved perfection. there is still work to be done in all four areas of the framework, particularly in relation to microeconomic policies. policy - makers should always be looking for ways to improve economic performance. in that vein, i now want to return to the topic of monetary policy and talk briefly about the potential role of asset prices in monetary policy. asset prices and monetary policy let me emphasize that i believe that our monetary policy framework, based on an explicit inflationcontrol target and a floating exchange rate, is the best choice for canada. our floating currency helps facilitate the economic adjustments that will always be necessary when shocks occur. this is particularly important for a relatively small and open economy such as ours. all told, canada has a coherent monetary policy regime that has proven its worth — one that gives us a solid base for sound long - term economic growth. but the recent dramatic fall in the share prices of so many technology firms — the so - called bursting of the tech bubble — highlighted the debate about the role of asset prices in the conduct of monetary policy. it somehow seems appropriate that i should talk about this question here in the netherlands, the location of one of the most famous asset - price bubbles in history — the tulip bubble of the seventeenth century. this episode, where mass speculation led to the dramatic rise and subsequent collapse in the price of tulip bulbs, illustrates that asset - price bubbles can have serious repercussions for a country ’ s economy when they burst. there has been a tendency recently, particularly in the united states, to ask whether central banks “ should try to pop bubbles when they

see them, before they get too large ”. let me be clear : i do not believe that central banks should try to target asset prices in the same way that we target the inflation rate. and i do not believe that we should be in the business of popping bubbles. to do so would be unrealistic. it would presume that central bankers know better than anyone else what represents fair value for assets. we don ’ t. instead, the real issue is, what is the role of asset prices in the setting of monetary policy? central banks — and here i ’ m speaking about the bank of canada in particular — do take into account the information contained in asset prices in a number of ways. when we set interest rates, we look at costof - capital effects and wealth effects, as well as the impact of changes in asset prices on confidence. and there are some asset prices, expressed as the yield spread between high - and low - risk bonds, that give an indication of credit conditions in the economy, so we look at those too. other asset prices, such as the cost of new houses, form part of the bank of canada ’ s core measure of consumer prices, and are therefore taken into account directly. so clearly, movements in asset prices do play a role and are taken into consideration when we set monetary policy. all of these ways of looking at asset prices provide some information about the future inflation environment within our 18 - to 24 - month horizon for inflation targeting. but the broader question is, are there ways in which asset prices can give central banks information about price pressures beyond this medium - term horizon? if so, what should be done about it? let me give you a more concrete example. consider the following scenario for an inflation - targeting central bank. let ’ s assume that inflation is near its target, but demand in the economy is weak, and the output gap is widening. this situation would normally call for an easing of monetary policy. but what if, at the same time, there was evidence that the prices of assets such as equities or real estate were rising well above historical norms, or that there was a real surge in credit issuance relative to historic levels, or evidence of speculative overinvestment? should a central bank then adopt a somewhat tighter policy than it otherwise would? and if it did, would this be effective in limiting the rise in asset prices? should the central bank run the risk of inflation falling below the target, to