so called because its participants are limited to financial institutions, while the open market's participants also include firms and local governments. the call market is an interbank market where short - term funds are traded among financial institutions so as to clear their daily excesses or shortages of funds. the call market is further subdivided into the uncollateralized and collateralized call markets, according to the collateral requirements for trading. examples of open markets include the bond gensaki market, the repo market ( for the lending / borrowing of japanese government securities against cash collateral ), the certificate of deposit ( cd ) market, the commercial paper ( cp ) market, the treasury bill ( tb ) market, and the financing bill ( fb ) market. the bank controls interest rates by conducting daily money market operations where it buys and sells financial instruments such as bonds through competitive auctions, thereby adjusting for excesses or shortages of funds in the money market that may arise, for example, from changes in the supply of banknotes and public funds. the interest rate assigned as the target in such an operation is the uncollateralized overnight call rate. the bank's conduct of monetary policy begins with this exertion of control over the uncollateralized overnight call rate, and this is then conveyed through interest rate arbitrage to other rates in the money and bond markets as well as on deposits and loans, thus eventually coming to affect economic activity as a whole. c. how the change in the money market interest rate is conveyed to medium - to longterm interest rates the mechanism by which a very short - term market interest rate, such as the uncollateralized overnight call rate, is transmitted through to interest rates at the longer end of the market is based on the idea that medium - to long - term interest rates are constructed as an average of expected short - term interest rates during the period concerned, plus a risk premium covering uncertainty. the implication is that while the central bank tends to determine a very short - term interest rate in accordance with the economic and price situation, medium - to long - term interest rates are determined by market participants'expectations concerning the future evolution of economic activity and prices, the central bank's monetary policy response to these developments, and the appropriate size of the risk premium given the level of uncertainty in the economy. medium - to long - term interest rates determined in this way reflect market projections of the future path of short - term interest rates.

, the public, and especially middle - and lower - income groups, can feel more confident that their savings and purchasing power will not be eroded by high inflation. and all borrowers can be more confident that the burden of their debt will not be increased through deflation. low inflation also helps to win the public ’ s trust in the functioning of a market economy. as former bank of canada governor gerald bouey put it, “ inflation melts the glue that holds free societies together. ” in canada, we focus on inflation in a symmetric way. in doing so, we aim to avoid inflation while also minimizing the risks of deflation. such an approach brings important economic benefits. but it also assures creditors that the value of their investment will not be eaten away over time. and it assures debtors that the burden of their debt will not increase in the future because of deflation. the fifth lesson has to do with capital flows and exchange rates. open markets and the free flow of capital can greatly accelerate development. but, as i noted before, open markets and capital flows can make individual countries vulnerable to shocks that originate elsewhere. so there is a need for countries to have a mechanism in place that helps their economies adjust to shocks. recent experience has taught us how important it is to have this kind of adjustment mechanism in place and, in particular, how a floating exchange rate can play this role. i know that not everyone here would agree that the floating exchange rate is the best adjustment mechanism for every country. based on canada ’ s long experience with a floating currency, i can certainly say that it has served us well. but i ’ m sure that we can all at least agree that there will always be shocks, that such shocks will have different effects on national economies, and that flexible exchange rates can help to facilitate the necessary adjustments. this lesson was clearly brought home during the asian crisis of 1997 - 98. many asian countries, but also countries like canada that are particularly vulnerable to sharp fluctuations in commodity prices, made relatively quick adjustments to a difficult situation through the floating exchange rate mechanism. how does this relate to trust? through the need to trust in market forces, i would say. when exchange rates float and capital moves freely, investors can trust that market forces are being allowed to do their job. there is an assurance that when shocks arise, countries will not be shielding their economy from market forces through restrictive trade practices, arbitrary controls on capital flows, or fixed exchange rates