that an aggressive taylor rule is not sufficient to determine inflation. the former authors suggest how price level determination can be achieved using a hybrid rule that augments an activist taylor rule with a commodity price peg. note though that their implementations implicitly require the cb to have the ability to buy back money from the public. if the cb can only hold assets issued by the fa, then the fa ’ s actions will influence the value of the cb ’ s portfolio and thereby influence the cb ’ s ability to implement a given price level path. in this sense, the cb does not have independent control of the price level. bis central bankers ’ speeches should the cb be required to never intervene in this sort of insolvency scenario? i ’ ve argued that a ban on these interventions will give the cb more independence in its control over the price level. for those who think of cb independence as being the foundational element of macroeconomic policy, that pretty much settles the question. but i see a couple of reasons for caution here. it is certainly conceivable that fa insolvency can be triggered by shocks that are well outside the control of the fa itself. and, empirically, fa insolvency is associated with large short - term and even medium - term declines in output. should the cb be prepared to drive the fa into insolvency given the possible adverse economic impact on the country? more subtly, regardless of the fa ’ s solvency, sovereign debt issues can fail simply through a coordination failure among investors. if i, as an investor, don ’ t anticipate that others will buy into the debt issue, i won ’ t either. in this sense, sovereign debt issues may be susceptible to suboptimal “ runs. ” the cb can eliminate this possibility by ensuring the nominal promises of the fa whenever the fa is threatened with default. thus, i see trade - offs. on the one hand, if the cb is known to be willing to intervene to keep the fa solvent, then inflation is necessarily shaped by fiscal considerations and by the shortrun incentives of elected officials. we know from many years of theoretical and empirical research that this effect is not a desirable one. on the other hand, if the cb is fully committed to allow the fa to default if necessary, then even optimal debt management by the fa may end up exposing the country to troubling risks, like sovereign debt runs. let me wrap up. i ’ ve argued that even

than other g - 7 countries, our economic growth has been disappointing in the past year. i think we can agree that the finish line is proving elusive ; we “ are not there yet. ” looking ahead, the bank sees the economy gaining momentum through next year and 2015, but there are uncertainty and risks around the outlook. over time, one can expect the economy to operate at its full capacity, with no output gap and with inflation steady at its target rate. at that point, the growth rate of potential determines the pace of economic activity. it is worth noting that reaching potential growth does not necessarily imply that the economy has returned to its natural or self - sustaining growth rate. depending on the circumstances, monetary policy may still need to provide stimulus or restraint. bis central bankers ’ speeches if my speech today achieves its potential, you will gain a deeper understanding of potential output in canada, why it is hard to measure, why it has slowed, where we are today, and what the future may hold for our economy. deconstructing the immeasurable measuring potential output and the output gap is difficult because potential is not directly observable. it is hard to measure what could be. what we try to do is determine the level of output that can be achieved with available resources ( labour, capital and materials ) without creating inflationary pressures. potential output as a concept, and its link to inflation, make a lot of sense. time is the most precious quantity, and as you know too well, balancing our professional and personal lives is no easy task. and as the former encroaches on the latter, history tells us that wage pressures begin to build, eventually leading to higher prices. similarly, when a firm ’ s production can ’ t keep pace with demand, prices move up in an attempt to restore balance. but while conceptually appealing, accurately measuring potential output is a formidable task. to do so, we must take a view not only on how many hours people are willing to work at a given wage, but also on how productive these people will be when their labour is combined with other inputs, such as machinery and equipment or on - the - job training. at the aggregate level, the future trajectory of potential output will depend on a lot of variables : on how strong the demand is for our goods and services, on how much existing firms decide to invest in research and development and technology, on how many new firms are created, and other unknowns. 2 it