an order that has the great advantage of providing for continuous adjustment in response to price signals. a flexible exchange rate adds one more market - determined price. it not only absorbs shocks, but it uses prices to facilitate changes. at the same time, we must always remember that a flexible exchange rate is just one of several key policies that are critical to achieving economic efficiency. but a flexible rate is crucial if a country is to pursue an independent monetary policy aimed at price stability. during my remarks, i will illustrate some of my points by drawing on canada's lengthy experience with a floating exchange rate. our experience can be very instructive for others, even though 57 years have passed since canada broke with the bretton woods system and implemented a flexible exchange rate regime. we have had more experience with this type of exchange rate mechanism than almost any other country in the world, so we have a deep understanding of how it works. canada's bold – some might say radical – decision in 1950 to break with the bretton woods system was driven by a couple of problems. some of these problems still plague many emerging - market economies today. in the late 1940s, canada was dealing with a large inflow of foreign capital and postwar investment, as well as strong household demand. following an earlier revaluation of the canadian dollar, short - term capital was flowing heavily into the country amid speculation about another revaluation. rising commodity prices were also adding to upward pressure on the dollar. all of this led to concerns about inflation, as well as worries that capital inflows might lead to a sizable increase in the country's foreign debt. unfortunately, the fixed exchange rate meant that policy - makers had to focus monetary policy on exchange rate stability, rather than on steps that would have been appropriate to stabilize domestic prices. to give the bank of canada the freedom to pursue policies aimed at stabilizing prices, authorities took the critical step of allowing the dollar to float at values set by the market. i'd also like to remind everyone that this policy continues : the bank of canada today still has no specific target for the dollar, because we believe that market conditions should determine the currency's value. the 1950 decision to float the currency was controversial, especially with the international monetary fund and most of its member states, which subscribed to a fixed exchange rate regime. but in the postwar years, experience proved that a floating exchange rate was truly beneficial for domestic policy. however, during the 1970s

and 1980s, the canadian - dollar foreign exchange market was quite thin. as a result, the bank of canada had to intervene on a day - to - day basis with the aim of providing liquidity and reducing volatility. this strategy of " leaning against the wind " was pursued symmetrically, with the goal of smoothing fluctuations in either direction. by the 1990s, however, markets had become deep enough that daily interventions were no longer helpful. government policy now restricts such interventions to the most exceptional circumstances and, in fact, canada hasn't intervened to influence the canadian dollar since 1998. uncertainty under fixed and flexible exchange rates despite canada's success with a flexible exchange rate system, there are still critics who find it hard to deal with the uncertainty that can come with a floating dollar. large currency movements, such as the roughly 35 per cent appreciation in the canadian dollar since early 2003, can be hard for businesses to deal with. a floating currency does entail somewhat larger transactions costs and, in the short run, additional risks for business. in this regard, the development of deep and well - functioning forward foreign exchange markets is extraordinarily important in assisting businesses to hedge their foreign exchange risk. such well - developed markets, along with financial institutions geared to providing business – especially small business – with the opportunity to hedge at low transactions cost, minimize the additional exchange risks that businesses face under a floating exchange rate regime. but even with well - developed foreign exchange markets and the ability of firms to hedge, some still fear that a flexible exchange rate will introduce undue risks and uncertainties. they argue that fixed exchange rates are the solution. but a fixed exchange rate is no panacea. over time, a fixed nominal exchange rate can actually heighten uncertainty and, eventually, add to volatility. a fixed rate limits the actions of central bankers because monetary policy must be aimed at protecting the fixed level of the exchange rate. under a regime of fixed nominal exchange rates, the economy is forced to absorb the full effect of changes in world prices through changes in domestic nominal wages and prices. to bring this about, the burden initially falls on output and employment and, eventually, spreads to most wages and prices. and because domestic wages in particular tend to be " sticky, " changes in output and employment need to be quite large. thus, adjustment tends to be more difficult and more costly for many individuals, businesses, and the economy, than would be the case under a flexible exchange rate