banks soon followed. to put things very simply, the bank influences inflation by lowering or raising interest rates to heat up or cool down the economy. the idea is to adjust rates to balance total demand and supply, thereby stabilizing inflation. low interest rates stimulate demand by encouraging people and businesses to borrow, spend and invest. high interest rates do the opposite. in practice, inflation targeting is much more complex and difficult than this. many forces that affect demand and supply in the economy lie beyond our control. what is more, our policy actions take time to have their full impact — up to two years. this means that we are always working with forecasts of where the economy and inflation will be in two years, and attempting to influence those things in the future. 1 / 6 bis central bankers'speeches a crucial feature of this framework is that we have just one policy instrument : our influence over interest rates. this represents the first major limitation on the power of monetary policy. with only one instrument, we can aim at only one objective. if inflation is our objective, we cannot use interest rates to target other things, such as the exchange rate or the unemployment rate, at the same time. of course, that is not the same as saying that interest rates do not temporarily affect other things, such as economic growth and employment, as we go about targeting inflation. but ultimately, inflation is the sole target of the policy. in the late 1980s, when inflation targeting first came under active consideration, many were skeptical that it could work at all. as it turns out, it has worked very well. inflation expectations have become firmly anchored on our 2 per cent target. a symptom of our success is the fact that many people do not appreciate how problematic high and variable inflation and interest rates can be. this is a gift to the next generation, if you will. my children will never pay anything like the kind of interest rates i have paid in my lifetime. it is not just that inflation and interest rates have been lower and more stable. with inflation expectations well anchored, monetary policy is more effective. the economy adjusts more quickly to shocks than in the past. firms and households can make longer - range plans. wage negotiations are much simpler. economic cycles are less severe. unemployment is lower on average and less variable. these observations are based on global experience from the early 1990s to the mid - 2000s, a 15 - year tranquil period called the great moderation. all that success has led

##ize their banking system. now, they are reaping the benefits as the recovery in the united states gathers momentum. second, the overall coherence of the reforms, their proportionality relative to the risks and their macroeconomic effects are considered before the reforms are finalized and implemented. 21 third, concerns about possible adverse effects of these reforms on the financial system and, in particular, on market functioning, are being addressed by the fourth step in the fsb policy cycle. the fsb regularly and closely monitors the effectiveness of new regulations, keeping an eye out for any material unintended consequences. as we know only too well, the global economy and, in particular, the global financial system, are highly integrated. canada learned that lesson during the recent financial crisis, when adverse shocks spread rapidly through financial channels. we also know that the pace of global financial and economic integration will continue unabated. thus, to ensure the resilience of the global financial system and, ultimately, of the global economy, we need a global organization that can coordinate the necessary efforts, especially across borders, to tackle emerging gaps and weaknesses in financial regulation and supervision and thereby help to prevent future crises like the one we just experienced. for this we have the fsb – a post - financial - crisis institution for a post - financial - crisis world. thank you very much. the g - 20 leaders agreed that the fsb ’ s mandate should be strengthened ; that it be given permanent legal standing ; and that its capacity and resources be increased. 21. see “ assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements ”, bank for international settlements, december 2010 ; “ assessment of the macroeconomic impact of higher loss absorbency for global systemically important banks ”, bank for international settlements, october 2011, and “ macroeconomic impact assessment of otc derivatives regulatory reforms ”, bank for international settlements, august 2013. bis central bankers ’ speeches