globalized financial markets, such persistent interest rate differences in the circumstances i have described are possible only with a floating exchange rate. in both these examples, the exchange rate acted as a shock absorber between the us and canadian economies, helping to facilitate the needed adjustment in response to differing shocks and differing policy requirements. even though our two economies are closely linked, they can move in different directions. and when that happens, the shock - absorber role of a floating exchange rate is invaluable. although these recent examples involved downward adjustments in our currency, this has not always been the case. indeed, there have been times when economic shocks and policy differences in the two countries have worked in the opposite direction, leading to increases in the value of the canadian dollar. it is, of course, possible to cope with unexpected shocks and policy differences under a fixed exchange rate or a monetary union. but the adjustment process will take longer, will be more difficult, and will cost more overall. imagine the adjustment in our economy that would have been required in 1997 - 98 in response to the fall in commodity prices, if the canadian dollar had not been floating. to maintain a fixed exchange rate throughout that period, much higher interest rates would have been necessary to resist the downward pressure on our currency from the falling receipts for commodity exports. in effect, this would have meant a more serious economic slowdown to bring wages and salaries down to a level that would make other industries more competitive and allow them to increase their exports. even under a common - currency arrangement, we would still have had to go through much the same adjustment over the longer term. but under such an arrangement, more of the short - term pain - in terms of declines in employment and incomes - would have been felt in the primary industries and in regions of canada with a higher concentration of such industries. the bottom line is : there is no escaping the need to adjust to real economic shocks regardless of the currency regime. but a floating - rate regime does help to facilitate and smooth the adjustment process. before concluding, i would like to quickly deal with a couple of common misconceptions about flexible exchange rates. the first one relates to the incentives for business to innovate and invest in new technology. if the argument here is that a low exchange rate gives exporting firms easier profits and blunts their motivation to innovate and become more efficient and competitive, i am inclined to say that this suggests a rather serious problem of corporate governance. surely

. but that is not all that matters. the real world is a more complicated place, as i shall explain in a moment. and that is why a floating exchange rate regime makes sense for canada. the case typically made for a floating rate for canada is that it gives us the chance to run an independent monetary policy. that is true. but these days, there is really very little difference in the low - inflation objectives of industrial countries. the real value of a floating exchange rate for canada is that it allows us to have different monetary conditions than the united states - monetary conditions appropriate to our own economic circumstances, even as we pursue the same general objective of low and stable inflation. the significance of having this option is our ability to respond to external economic shocks that affect us differently from our southern neighbours, or to respond to differences in domestic economic policies. let me give you a couple of examples of economic shocks and policies that have reflected these differences. fluctuations in world commodity prices are an important first example. although our reliance on primary commodities has diminished substantially through the years, such goods still account for 30 to 40 % of canada ’ s exports. the united states, on the other hand, is a net importer of commodities. the asian financial crisis of 1997 - 98, which led to a 20 % decline in the prices of the key primary commodities that we export, was a major negative shock for canada. in contrast, the united states benefited from these lower prices. the decline in the value of our currency against the us dollar at the time was in response to that economic shock. and it helped canadian manufacturing and other non - commodity sectors to increase their exports to the united states. in this way, the impact of falling employment and incomes in our primary sector because of the lower commodity prices was largely offset by greater expansion in these other sectors. another example involves the fiscal restraint measures that were undertaken by our federal and provincial governments, beginning in the mid - 1990s, to deal with persistent deficits and the resulting unsustainable accumulation of public debt. the united states also had a budgetary problem. but the need for fiscal tightening was much greater here and so was the effect of the corrective measures on total demand in our economy. to help the transfer of resources from the public to the private sector and so support overall demand in canada, we needed lower interest rates here than in the united states. these lower rates were maintained through most of the period from 1996 to the present. in today ’ s