and create jobs is the best we have had in years. i also believe that continued credible fiscal and monetary policies have an important role to play. the best contribution monetary policy can make towards achieving that potential is to ensure that the economic expansion remains sustainable over the medium term. as we have learned over the past 25 years, a sustained expansion is not possible unless we can avoid a resurgence of inflation and the painful cycles of boom and bust that go with it. thus, the challenge for monetary policy will be to set monetary conditions at levels that allow the economy to expand at a pace that makes full use of its production capacity and at the same time preserves low inflation. it is by conducting monetary policy prudently during the upswing that the bank can assure canadians that inflation will not break out when the economy begins to operate at levels that push against capacity limits. if we succeed in providing that confidence, we will then have the flexibility that will allow us to carefully explore the limits of growth and employment without immediately putting the economic expansion at risk. concluding remarks let me summarize my main messages to you today. the extraordinary monetary stimulus of the recent past has accomplished its task. it has supported the economy through a period of difficult but necessary restructuring. as the impact of this restructuring subsides and our economy enters a phase of self - sustaining expansion, we will no longer need the same amount of monetary stimulus. because the economy takes time to respond to monetary policy actions, the bank has to focus on the future. this means taking steps early to ensure that we will reach full capacity at a sustainable cruising speed. of course, projections of future economic trends need constant reassessment. and that is particularly true at a time of nervous financial markets and uncertainty about the implications that events in asia may have for the world economy. as i said earlier, the bank continues to monitor the current global situation carefully. aside from any complications that could arise from a prolonged period of international instability, the canadian economy in the next year or so should absorb the unused capacity that we now see. at that point, we will begin to see concrete evidence of the kind of payoffs we are going to get from the economic restructuring process we have been through. with low inflation and a sound fiscal position, the canadian economy is now in a better position than it has been for years to weather the impact of unexpected international developments and to make progress in generating higher incomes and employment.

healthy pace. and with widespread belief in the fed ’ s commitment to low inflation, there has been some room to explore the possibility that capacity has improved. as a result, the fed has been able to set monetary conditions that have encouraged output and employment to expand at rates that in the past could not have been sustained. and both unemployment and inflation have come down at the same time. to be sure, with tightening labour markets, there is some risk of an increase in inflation pressures in the united states. thus, one cannot rule out the possibility that the fed may have to raise interest rates somewhat further at some point. but any future increases in interest rates should not have to be large and may be conditioned by the implications of the recent international developments i mentioned earlier. what parallels can we find in all this for canada? the recent canadian experience the adjustment in canada to the forces of technological change and globalization has run behind that in the united states. because the restructuring was delayed, canada had to respond in a more dramatic fashion. we had to do more and do it faster. more importantly, our fiscal situation was more precarious and required stronger medicine. as a result, we ended up with more pronounced short - run disruptions and more catching up to do in terms of output and employment. these difficult but necessary adjustments in the private and public sectors of our economy were canada ’ s parallel to the u. s. headwinds. to compensate for the direct impact of these adjustments, as well as for their indirect effects on consumer confidence, the economy needed a substantial amount of monetary support. the bank of canada was able to provide such support once investor concerns about canada ’ s fiscal and political problems began to subside in late 1995. we did that by systematically reducing interest rates over the next year or so. as in the united states in 1991 - 92, short - term rates in canada were brought down during 1995 - 96 from over 6 per cent to about 3 per cent - - their lowest level in over 30 years. at the same time, the canadian dollar has been relatively low, providing support to the export sector. when we put interest rates and the exchange rate together - - as we must in order to correctly gauge the amount of monetary stimulus - - it is clear that monetary conditions in canada have been exceptionally stimulative for well over a year. this was entirely appropriate while our economy was still struggling against the headwinds of private and public sector restructuring. to return to my