to changing technology and globalization ; and the credible, low - inflation policy pursued by the u. s. central bank. the americans started adjusting in earnest in the 1980s to the new realities of heightened global competition and rapidly changing technology. as a result, they are ahead of most other industrial countries on that score. and, with improving productivity and highly competitive enterprises in a wide range of sectors, the u. s. economy has been able to expand rapidly and to support rising employment on a sustained basis. but taking full advantage of that improved potential for economic growth has required a climate of confidence in monetary policy. bringing inflation down in a credible manner has helped to create that climate. and because of this, the u. s. monetary authorities have been in a position to encourage the economy to test its full capacity to produce, to create jobs, and to support rising incomes. this would not have been possible in an environment of high inflation and high inflation expectations. in such an environment, businesses, workers, and investors respond swiftly to any signs of demand pressures by pushing up prices, wages, and interest rates. and this has the effect of undermining the sustainability of the economic expansion. what precisely did the u. s. federal reserve do? in the early 1990s, problems in the banking sector were restraining the economic recovery in that country by limiting access to financing and undermining confidence. to counter these “ headwinds ”, as alan greenspan called them, the fed responded by providing a high degree of monetary stimulus. then, in early 1994, when it became evident that the economy had started to pick up steam and move ahead on its own, the fed began withdrawing the excess monetary stimulus. this timely, pre - emptive action to moderate monetary stimulus accomplished two things. first, it sent a strong reassuring signal to investors, businesses, and consumers that the fed would not let inflation break out as the economy surged ahead. indeed, after short - term rates went up in 1994 - 95, long - term rates declined, as investors became more confident that the economic expansion would remain non - inflationary and, thus, sustainable. second, the pre - emptive action helped avoid the need for stronger, more disruptive, tightening later on. the less - accommodative monetary conditions that have prevailed since then certainly have not stopped the u. s. economic expansion dead in its tracks, as some had feared at the time. on the contrary, the expansion has continued at a

the conventional estimates of potential output, monetary policymakers must be on guard. in other words, we are at the point in the economic cycle where the bank of canada will have to be very alert to early warning signs of accumulating price and cost pressures. and we will have to respond promptly and firmly if any such signs emerge. the bank will deal with this risk by closely monitoring a wide range of indicators that can help it to assess the extent of present and future pressures on capacity and on inflation. these indicators include unanticipated movements in current inflation, changes in expectations of future inflation, the growth of money and credit, and information gathered from the bank ’ s regular contacts with businesses across canada. in conclusion, let me say that you can be assured that the bank is very sensitive to the increased risks of inflation that are coming from continued buoyant growth in the united states, improved economic prospects in europe and japan, and the increased momentum of domestic spending here in canada. in facing the various challenges that may arise over the next year, it will be crucial to ensure that the bank continues to deliver a trend of inflation that is inside our target range of 1 % to 3 %. it is only when canadians can count on inflation staying low and stable that our economy performs best.