faced. looking ahead still, our experience of the past two years makes it clear that the status quo is no longer sufficient. at the bank of canada, we must strengthen our frameworks, in terms of both monetary policy and financial stability, to increase the country's capacity to avoid crises to the extent possible and to address shocks when they do occur. in terms of monetary policy, there are two critical streams to our work plan. the first relates to our inflation - targeting regime. in november 2006, when we renewed the current five - year inflation - target agreement with the federal government, we also launched a research program to examine ways to strengthen our monetary policy framework. 3 two questions were posed : what are the costs and benefits of a lower inflation target? what are the costs and benefits of a price - level target? 4 considerable study on these two questions has already been undertaken, involving not only researchers at the bank, but also academics and colleagues at other central banks. i won't review this work today. however, more information can be found on our research website, http : / / www. inflationtargeting. ca /, and in summary articles in the bank of canada review. 5 we will take a hard, objective look at what the research finds, and you can expect to hear more from us on this subject in the coming year. the second stream relates to the transmission mechanism – that is, how our monetary policy actions work their way through financial markets and the economy. the crisis has made it abundantly clear that central banks must have a better understanding of the links between the real economy ( that is, output, inflation, and employment ) and the financial sector. for example, time - varying term, liquidity, and risk spreads have been shown to be empirically relevant for explaining real activity, as have non - price terms for credit. another important insight from the financial crisis is that broader procyclical dynamics – that is, forces that amplify cyclical fluctuations – in money, asset, and credit markets also have implications for the real economy and hence, monetary policy. a critical part of the bank's research agenda is on these real - financial linkages, to better understand them and incorporate them into our models and policy analysis. one exception was in a very specific segment of the canadian market for non - bank - sponsored, asset - backed commercial paper ( abcp ), which had transparency problems and which led to the standstill under the montreal

. such a persistent error would reduce credibility over time. it is worth considering whether targeting the price level would enhance policy credibility in the face of a large, persistent shock. if anticipated, temporary price - level drift could be accommodated by extending the horizon, while credibility would be retained by the fact that the drift would be tracked and eventually reversed. if unanticipated, the promise to correct it that is central to price - level targeting could preserve credibility. the bank of canada is currently pursuing a research agenda to determine the gains from adding greater price - level memory to the inflation - targeting framework. conclusion to conclude, constraints in the policy framework may have helped to gain credibility for the framework when it was new, but now that it is better understood, it is time to ask whether we can do better. in principle, we could do better by making inflexible elements more flexible or by giving the framework more memory about the price level to compensate for any loss of credibility. doing so should increase social welfare by allowing policy to be better aligned with the natural adjustment processes in the economy, thereby adding to the social welfare benefits that come from delivering low, stable, and predictable inflation. see the presentation by blinder to this conference, published by the bis.