targets, with rare exceptions that were due mainly to large swings in the prices of oil or other commodities. further, there is evidence that inflation targeting has been successful as a macroeconomic stabilizer, helping to smooth the peaks and valleys of the business cycle. our symmetric approach to inflation targeting is crucial in this regard. because we guard against both inflationary and deflationary pressures, businesses and individuals can make long - range economic plans with increased confidence. scarce economic resources are no longer wasted trying to hedge against the threat of runaway inflation. and because our paradigm makes it clear that we guard against deflationary pressures, canada has avoided any serious threat of deflation. throughout all the shocks we have experienced, canadian inflation expectations have remained remarkably well anchored on the 2 per cent target. at the time that we were considering the adoption of inflation targeting, we heard many of the same arguments against such a framework that we hear today in the united states. some argued that inflation targeting could constrain our ability to act, or would take away our ability to apply our own judgment in the conduct of policy. our experience has shown these concerns to be groundless. let me illustrate with a couple of recent examples. in the immediate aftermath of the 9 / 11 terrorist attacks, we lowered interest rates quickly and decisively to underpin confidence, which could have been profoundly shaken by the attacks. when a major loss of confidence did not materialize over the next few months, we were able to reverse course and withdraw some of that monetary stimulus. our inflation - targeting framework did not restrict our ability to act. indeed, because our paradigm is clear, financial markets were able to understand why we made these rapid rate adjustments. another example is our reaction to the continuing realignment of world currencies over the past two years. the canadian economy has had to adjust to sharp movements, not just in the external value of our dollar, but also in the foreign demand for many of our goods and services. inflation targeting gives the bank an important guideline for dealing with the currency appreciation, allowing us to maintain our focus on macroeconomic stabilization at a time when various sectors of the economy are dealing with the exchange rate shock. our paradigm has given us the flexibility to apply judgment in the face of considerable uncertainty over this period. the future of inflation targeting before i close, let me say a few words about the future of inflation targeting in canada. as i noted at the beginning, our current agreement with the federal government is up

goal of price stability came to be defined as low and stable inflation. like many other central banks, we chose a target for the annual increase in the consumer price index ( cpi ). initially, our focus was on inflation reduction. so it was announced that the target would decline gradually - from the 3 per cent midpoint of a 2 to 4 per cent target range at the end of 1992 to the 2 per cent midpoint of a 1 to 3 per cent range by the end of 1995. the target has remained there since. let me take you through some of the key decisions that we made in 1991, and the rationale behind our choices, as we set out the details of our framework. first of all, why did we choose the cpi as our target? the key reasons were that it is widely understood and is the measure of inflation most familiar to canadians. choosing a well - known indicator as a target makes it easier to explain our actions and to be accountable to canadians. however, movements in the prices of particularly volatile components of the cpi can cause the index to fluctuate sharply. so we use a measure of core inflation as an operational guide. this measure strips out the most volatile components and the effect of changes in indirect taxes on the rest of the index, giving us a better understanding of the trend of inflation. g. thiessen, " can a bank change? the evolution of monetary policy at the bank of canada 1935 - 2000, " the thiessen lectures, ( ottawa : bank of canada, 2001 ), p. 79. second, why have a range? while we emphasize the 2 per cent target, we have a range - as many central banks do - because monetary policy operates with long and variable lags. if we tried to target inflation too precisely we could have " instrument instability ; " in other words, we would be adjusting our policy interest rate sharply and frequently, which would lead to greater instability in the economy. further, measured inflation itself can be volatile as specific prices adjust. but to be clear, the range does not represent a zone of indifference - we do aim to achieve the 2 per cent target. third, given that we must always be forward looking as we conduct policy, what time frame would we choose to achieve our target? from the beginning, we said that if a demand shock pushed inflation away from the target, we would conduct policy so as to return inflation to target over a period of 18 to 24 months. this is because