##s has evolved rapidly since the pre - crisis era. a decade or so ago, the discussion was essentially between those who argued that monetary authorities should lean against imbalances such as asset - price bubbles and those who said that monetary policy should be reserved for cleaning up the mess after the bubble popped. before the financial crisis, the bank of canada basically straddled the two camps. on the one hand, we argued that it ’ s very difficult to identify an asset - price bubble, and central bankers have no comparative advantage in making this determination. like many, we questioned the wisdom of using the blunt instrument of interest rates on a bubble that could be confined to one asset class. indeed, if a bubble was particularly large and persistent, a central bank that used the cure of higher interest rates could end up causing the very economic damage it was trying to prevent. on the other hand, the bank recognized that price stability was a necessary, but not sufficient, condition for financial stability. given our keen interest in a well - functioning financial system and our macro perspective, we worked to raise awareness of stability threats. our decision to bis central bankers ’ speeches begin publishing our financial system review ( fsr ) in 2002 showed our early commitment to promoting financial stability. we used the phrase “ global imbalances ” a lot in speeches leading up to the crisis. in other words, we weren ’ t content to just stand on the sidelines and wait to clean up messes. the widespread and extremely high cost of the great recession made it clear just how difficult the clean - up job can be. it has been roughly seven years since the crisis, and the damage done to the global economy has left many central banks still struggling with weak growth and inflation. however, the more fundamental lesson we learned is that “ lean versus clean ” is a false dichotomy. it ’ s far too simplistic to say that financial stability threats compel central banks to choose between leaning and cleaning. in a perfect world, we would have a macroeconomic model sophisticated enough to capture the emergence and resolution of financial imbalances, along with their related impacts on the real economy. with such a model, we would be able to incorporate financial stability threats into our reaction function, if not with absolute precision, then at least as well as we incorporate other economic variables. unfortunately, we don ’ t live in that perfect world. a general - equilibrium model containing a grand synthesis of real and financial variables doesn ’ t

popular among central banks, and canada was an early adopter. under our current agreement, we aim to keep inflation around a target of 2 per cent, and we usually try to accomplish this over six to eight quarters. even in the absence of financial stability threats, the practice of monetary policy requires the central banker to deal with vast amounts of uncertainty. think of the most important aspects of a macroeconomic model – the level and growth rate of potential output, the real neutral interest rate, and the transmission of terms - of - trade shocks. none of these can be observed ; they all must be estimated. the assumptions that we make in running our models inject uncertainty throughout the policy - making process. and, since the crisis, we have also been confronted with the risk that our models have been distorted because of fundamental shifts in economic behaviour. now, on top of all this uncertainty, we have to add the uncertainty represented by risks to financial stability, a concept that is difficult to quantify. adding this whole other dimension of uncertainty complicates the practice of monetary policy by forcing us to weigh both sets of risks, the probabilities that they will be realized and the potential consequences of a policy error. so how do we manage the risks? at the bank of canada, we try to be realistic about the things we don ’ t know and do a thorough examination of the related risks. every time we come to a decision, there are a number of potential paths for policy that could be consistent with the inflation goal. in the process of formulating policy, we weigh these possibilities and focus on those that fall into a zone where the range of likely outcomes makes us reasonably certain that we ’ ll achieve the inflation target over an acceptable time frame and that financial stability risks will evolve in a constructive way. still, we know there can be times when setting policy to achieve the inflation target within the usual time frame can increase the level of financial stability risk to an unacceptable level. this would take us out of the zone where the risks are essentially balanced. because the flexibility in our framework allows it, we reserve the right to choose our policy tactics so that our actions don ’ t significantly worsen financial stability concerns by opting for a policy path that aims to return inflation to target over a longer time frame than normal. bis central bankers ’ speeches risk management, then, does not mean that the central bank will adjust policy to try to lean against every emerging financial imbalance. since we are an inflation