. on the macroeconomic side, governments should continue to aim for sustainable fiscal policies, with budgets in rough balance or in small surplus. but i want to spend a few minutes speaking about monetary policy and the role of the bank of canada. the bank of canada's monetary policy aims to preserve a climate of low, stable, and predictable inflation. this can help with the adjustment process in several ways. such a climate minimizes the distortion of price signals that can lead to inappropriate investment choices. low and stable inflation allows firms to undertake long - term investments with greater certainty. but crucially, low inflation also reduces the risk premium demanded by investors. this means that nominal long - term interest rates are kept low, which supports the investment that helps with the adjustment process. in addition, the bank's monetary policy has a stabilizing function, which also facilitates adjustment. let me explain. we keep inflation in check by trying to have the economy operate at full capacity, with aggregate supply and demand in balance. in doing so, we help the adjustment process because resources that are released by sectors under pressure can be more readily absorbed by sectors that are expanding. we see clear evidence of this process happening right now in canada. let me now say a few words about how our flexible exchange rate fits into our monetary policy framework. there are some who have called on the bank to smooth out fluctuations in the canadian dollar, or to slow its ascent. but we have one monetary policy instrument - our influence over interest rates - so we can have only one target. canada has chosen low inflation as the target, because experience clearly shows that low inflation is the best contribution that monetary policy can make to economic health. we do not have a target for the canadian dollar. however, this does not mean that the bank does not care about the impact of movements in the exchange rate on the canadian economy. the truth is quite the opposite - the exchange rate plays an important role in our monetary policy deliberations. exchange rate movements tell us something about economic developments that may be having a direct impact on the demand for canadian goods and services. and the movements themselves have their own effect on aggregate demand, by changing relative prices and by shifting demand between domestic - and foreign - produced products. the challenge for the bank is to evaluate these movements, together with other data, and to set a course for monetary policy that works to keep demand and supply in balance and inflation low and stable. in making this evaluation, we try to

late 1990s, it has remained in a historically low range. volatility here refers to the second moment of the distribution of financial returns. the volatility of returns in charts 3 to 6 has been computed using the exponentially weighted, moving - average - of - squared - returns methodology suggested by riskmetrics. returns for equities are calculated as the log difference in the level of the s & p / tsx composite index. returns for bonds are approximated by multiplying the negative of the duration of the bond by the change in the benchmark bond's yield to maturity. returns for commercial paper are calculated as the log difference of the price of the instrument, which is calculated as the inverse of one plus the commercial paper rate. i should add that although the decline in the volatility of short - term rates was almost certainly driven by the decline in the level and the variability of inflation, the most recent period was also likely influenced by changes in the way the bank implements monetary policy. i'm referring to increased transparency and improved communication, which, all else being equal, should mitigate interest rate volatility. since introducing an inflation target, the bank of canada has become increasingly open and transparent about its views in its monetary policy reports and updates, press releases, and speeches. at the end of the year 2000, the bank introduced " fixed announcement dates. " that is, we started to make our policy rate announcements eight times a year on a fixed schedule. this schedule has reduced uncertainty in financial markets about the timing of policy actions, and has helped to direct attention to the medium - term perspective of monetary policy. this focus has in turn allowed us to more effectively communicate our views on the future path of inflation. of course, reduced market uncertainty should, in principle, lead to a decline in volatility. and the focus on macroeconomic fundamentals over the medium term helps market participants and the public to better understand the bank's assessment of the balance of forces that affect inflation in canada and hence to anticipate the direction of monetary policy. our research tends to confirm that the fixed announcement date process has, in fact, enabled financial markets to better price fixed - income instruments. 3 now, let's look at volatility at the longer end of the market. the volatility of the returns for benchmark government of canada 10 - year bonds has also declined substantially over the period, as is evident in the chart. the past