sheryl kennedy : canada's monetary policy framework dealing with global economic change remarks by ms sheryl kennedy, deputy governor of the bank of canada, to the international finance club of montreal, montreal, 12 january 2006. * * * it's a pleasure to be in montreal and to be speaking to the international finance club. i'd like to take this opportunity to discuss the bank of canada's monetary policy framework — what it is, and how it works to promote strong economic growth and facilitate adjustment to economic change. you are an ideal audience for these remarks. your expertise in international finance gives you a clear view of how quickly national economies and financial markets around the world are changing. and you know that in a global economy, canada's economic well - being depends on how effectively it responds to these developments. the constant economic change that we've been experiencing makes it critical for the central bank to stand on a firm foundation as it works to enhance the country's economic strength. the bank of canada's monetary policy framework is such a foundation. in a moment, i'll outline how this framework works to mitigate the effects of shocks, facilitate the adjustment process, and promote sound economic performance. but first, let me discuss some of the major global forces that have been affecting the canadian economy. in recent years, a strong global economic expansion has contributed significantly to a sharp rise in the prices of energy and some other commodities. with energy and other commodities accounting for about 45 per cent of our total exports ( and some 13 per cent of all value - added economic activity ), these relative price movements have led to a substantial improvement in our terms of trade. by this i mean that the prices we receive for our exports have been rising faster than the prices we pay for the goods and services that we import. together with downward pressure on the u. s. dollar because of that country's very large current account deficit, these improved terms of trade have led to a sharp appreciation of the canadian dollar. since the beginning of 2003, our dollar has appreciated by about one third against the u. s. dollar, as well as against a trade - weighted basket of currencies. as a result, the cost of many imported goods, including — importantly — machinery and equipment, has fallen. at the same time, canada has experienced increased competition from the rapidly growing economies of asia, especially china. but we have also been presented with new opportunities to expand trade with these countries

, and the vulnerability to takeover, are just some of the areas where corporate governance structures can play a key role in hindering or encouraging necessary adjustments. finally, and i would stress this point, the european labour market has been relatively inflexible to date, even if important structural reforms are now underway in many countries. obstacles to the adjustment of labour are just as important as obstacles to the adjustment of financial capital. they can result in dangerous inertia in cost structures. and they may prevent the productivity gains otherwise attainable through the reorganisation of business processes and products, particularly through the adoption of new technologies. the pattern of the restructuring process under way in europe tends in many respects to confirm these propositions. available evidence indicates that the tendency for the number of institutions to decline and concentration to rise is a generalised one. at the same time, it also indicates that in terms of cutting branches and, above all, employment, continental europe is lagging well behind english - speaking and nordic countries. this broadly underscores the picture that emerges from the behaviour of indicators of profitability, costs and creditworthiness reviewed above. tellingly, the evidence also indicates that the restructuring has proceeded fastest, and in some respects has gone furthest, in those nordic countries that experienced a banking crisis in the late 1980s and early 1990s. and it suggests that, while in terms of numbers of institutions consolidation has been most substantial among savings, cooperatives and mutual banks, employment appears to have been comparatively less responsive, except where financial difficulties have emerged. against this background of limited progress at the level of the firm, what can be said about the current wave of mergers and acquisitions ( m & a )? m & as are an important means through which restructuring can take place. indeed, the available statistics indicate that the share of financial sector deals in the total has tended to increase in recent years. also, the average size of transactions has gone up substantially. mega - deals of unprecedented proportions have been making headlines. at the same time, the experience with previous merger waves has, on balance, been somewhat disappointing. in addition, it stands to reason that the performance of merged entities is likely to be as sensitive as that of individual firms to a number of environmental elements, ranging from sub - optimal corporate governance structures to inflexibility in factor markets. a look at the current wave shows some brighter spots but is not free of clouds. on the positive side, cost - cutting and down - sizing in