david dodge : economic and financial trends in canada opening statement by mr david dodge, governor of the bank of canada, at a press conference following the release of the monetary policy report, ottawa, 22 october 2003. * * * today, we released our october monetary policy report. the report reviews economic and financial trends in the context of canadaa€™s inflation - control strategy. since our april report, the canadian economy has been hit by a number of unusual shocks : sars, bse, the ontario electricity blackout, and the severe forest fires in british columbia. inflation has also fallen faster and further than expected. this drop in core inflation reflected several unforeseen developments. these included a broad - based weakness in the prices of goods, substantial reductions in the prices of tourism - related services because of sars, and a slightly faster easing of pressures from auto insurance premiums. the substantial fall in the value of the u. s. dollar added to the weakness in goods prices. we now estimate that there is more slack in the economy than was projected in april. the prospects for near - term growth in the global economy have improved since april, and geopolitical uncertainty has continued to decrease. the near - term outlook for the u. s. economy is much improved. the economy in the euro area is still weak, but prospects for asia look bright, led by china and india. the japanese economy is performing better than anticipated. we expect growth in the canadian economy to strengthen during the fourth quarter and through 2004. on balance, the expansion should be above the rate of potential growth, relying primarily on solid household spending and increased business investment. stronger growth abroad should boost foreign demand for canadian products, but this will be dampened by the higher value of the canadian dollar. growth is expected to average a little over 3 per cent in the second half of 2003 and 3 1 / 4 per cent in 2004. with growth above potential, the slack in the economy should be absorbed by early 2005. we expect core inflation to average just over 1. 5 per cent for the rest of 2003, and to fall to just above 1 per cent in early 2004, as the effects of earlier increases in auto insurance premiums dissipate. core inflation should return to 2 per cent by mid - 2005, as economic slack is taken up. total cpi inflation will continue to be importantly affected by swings in the price of crude oil. if prices ease to us $ 27 per barrel next year, total

can be used to examine the merits of policy or regulatory initiatives such as capital and liquidity rules. as the model becomes more refined, the objective is to use it more to complement other existing macro stress - testing exercises and to sharpen our analysis and communication of risks in the bank ’ s financial system review. conclusion let me conclude. the bank of canada is conducting extensive research into finding methodologies and tools to identify and measure systemic risk. while work in this area is extremely complex, the bank has made substantial progress in recent years. we now have two state - of - the art models. and with hram, the bank of canada is one of the few central banks at the leading edge of using microsimulation models to assess vulnerabilities in the household sector. our efforts to build these models have provided us with important lessons. first, distributions matter – we cannot rely solely on aggregate data : distributional features and complex interactions are very important for assessing risks. this means developing models that capture these effects. our household simulation model is aimed directly at understanding how the distribution of debts, assets and income affects financial stability. mfraf uses information about the interconnections of individual financial institutions because these can lead to non - linear network effects that are also important for assessing systemic risks. second, predicting behaviour under stress conditions is very difficult. models need to be able to handle a variety of “ what - if ” scenarios corresponding to different assumptions about behaviours under stress. finally, we need to consider the many different sources of risk to the financial sector and take into account their cumulative effects and interactions ; otherwise we may underestimate risks. for international banks that were bailed out during the crisis. see c. gauthier and m. souissi, “ understanding systemic risk in the banking sector : a macrofinancial risk assessment framework, ” bank of canada review ( spring 2012 ) : 29 – 38. see a. haldane, “ tails of the unexpected, ” speech to the university of edinburgh business school, 8 june 2012 ). see c. borio and m. drehmann, “ assessing the risk of banking crises - revisited, ” bis quarterly review ( march 2009 ) : 29 – 46. also see a. foglia, “ stress testing credit risk : a survey of authorities ’ approaches, ” international journal of central banking 5, no. 3 ( 2009 ) : 9 – 45. bis central bankers ’ speeches obviously, quantitative measures