that low inflation will continue. in the past, a depreciation of our currency has frequently fed fears of inflation and has led to interest rate increases. the difficulties of the past couple of years also illustrate the value of a flexible exchange rate as a shock absorber. the downward movement of the canadian dollar from mid - 1997 to the end of 1998 was largely a response to the sharp decline in world prices of the primary commodities that canada exports. our economy had to adjust to this reality ; the exchange rate decline facilitated a shift in activity from the primary sector to manufacturing and other export sectors. it also provided an additional incentive for these sectors to take advantage of a strong us economy. because of these adjustments, the canadian economy continued to expand during 1998 and recorded a substantial upswing in 1999. when i last appeared before this committee, mr chairman, there were a number of questions about canada ’ s rate of productivity growth and about the gap in productivity levels with the united states. i am happy to report that there have been some positive developments over the past year. not only have we had better productivity gains through 1999, but purchases of machinery and equipment climbed 18 % during the course of the year. this continues the increase in investment in machinery, equipment and technology that began in 1996 and that mirrors the increase in investment that began somewhat earlier in the united states. while we are certainly heartened by the better productivity outlook in canada, we are not sure how large these gains are likely to be, how long they will last, or by how much they will eventually enhance our economy ’ s production capacity. this uncertainty raises an important issue for monetary policy, especially since, by some measures, the canadian economy is currently operating at or above full capacity. on the one hand, our low - inflation environment and the bank of canada ’ s commitment to maintaining it give us more room than we have had for some time to explore the economy ’ s full potential. however, because of the current strong momentum of the economy and the high levels of activity, the bank must be careful to avoid approaching capacity limits too rapidly. we do not want to trigger bottlenecks and shortages that can put unnecessary pressure on inflation. because of the time it takes for monetary policy to have its full impact on the economy, we can best achieve and maintain full potential if we approach capacity constraints gradually and carefully. we had these considerations in mind when we increased the bank rate in november, february and march. these increases followed similar rate hikes

( pillar iii ). this approach to capital regulation, with its market - discipline component, signals that sound accounting and disclosure will continue to be important aspects of our supervisory approach. the federal reserve and the other u. s. banking agencies are also actively involved in the efforts of the basel committee to promote sound international accounting, auditing, and disclosure standards and practices for global banking organizations and other companies. for example, an official of the federal reserve board is a member of the standards advisory council that advises the iasb and its trustees on iasb projects, proposals and standards. the u. s. banking agencies have been active in supporting the basel committee in its work with the iasb ’ s technical advisory groups to enhance the iasb ’ s standards for financial instruments and bank disclosures. the federal reserve board has also been active in supporting the basel committee ’ s projects with the international federation of accountants ( ifac ) and other international regulatory organizations, such as international organization of securities commissions ( iosco ), to promote substantial enhancements to global standards and practices for audits of banks and other companies. although the federal reserve board has been actively involved in addressing international accounting and auditing issues primarily through our involvement in the basel committee ’ s projects, the securities and exchange commission has had the primary role in discussing these matters with the eu representatives as part of the dialogue. cooperation on anti - money laundering and counter - terrorist financing issues while not historically part of the u. s. - eu dialogue, recent anti - money laundering and counter - terrorist financing regulatory initiatives on both sides of the atlantic have had a significant impact on banking organizations, many of which operate globally. because of the potential consequences of differences in regulatory approaches in this area, governments have been in frequent contact. in the end, the anti - money laundering provisions set forth in the usa patriot act and those contained in the eu anti - money laundering directive are generally in harmony. part of this can be attributed to the federal reserve ’ s and other u. s. and eu regulatory authorities ’ mutual involvement in multilateral policy efforts to improve regulatory systems so to prevent these crimes, such as the financial action task force and the basel committee ’ s cross - border banking group. on a practical level, supervisory dialogue and cooperation on anti - money laundering and counter - terrorist financing also has been necessary due to the role the federal reserve frequently shares with its eu counterparts as “ home / host ” supervisors of global banking organizations. however, this cooperation is typically