we worry as much about inflation falling below the target as we do about it rising above the target. through most of the last decade, we have succeeded in keeping inflation close to the target. and so, canadians'expectations for inflation have become anchored around 2 per cent. all this has helped to smooth out the ups and downs in the economy and to create the best possible environment for longer - term economic growth. this framework may sound simple in theory. but it is quite complex in practice. our monetary policy decisions are based on economic projections, which can always be thrown off by unforeseen events. because monetary policy actions take time to have their full impact on the economy, we must aim these actions at where we see the economy sitting 18 to 24 months into the future. in doing so, we are always looking at what is called the output gap - the difference between the actual level of production in the economy and the level of potential output. if the economy is operating above its potential capacity and inflation appears likely to be above target in the future, then we would tighten monetary policy. this would cool demand and bring inflation back down to the target. on the other hand, if the economy is operating below its potential capacity and inflation appears likely to be below target in the future, we would ease monetary policy in order to stimulate demand, close the output gap, and bring inflation back to its target. this means that we are always looking at demand and supply in the economy and trying to bring them into balance. so, in carrying out our policy, a large part of the analysis we do is concerned with the many factors that can influence demand and supply. the most important factor is, of course, the strength of domestic demand. but canada is a trading nation, and so the strength of world demand is also important to us. in particular, the united states is a major customer for canadian goods, so we closely monitor the health of the u. s. economy. economic activity is also affected by movements in exchange rates. as you well know, there has recently been a significant adjustment in the value of the u. s. dollar against major currencies, including the canadian dollar. as always, we need to understand the causes of this movement, as well as its effect on the canadian economy. furthermore, movements in exchange rates have a direct effect on the prices of traded goods and services and, therefore, on inflation. however, our research has shown that, in economies such as canada

##rs ) would be an intriguing alternative reserve asset. 12 using sdrs appeals to a sense of fairness in that no one country would enjoy the exorbitant privilege of reserve currency status. like a multiple reserve currency system, it may reduce the aggregate incentives of countries that supply the consistent currencies of the sdr to run deficits. in addition, there appears to be no technical reason why the use of sdrs could not be expanded. however, the question must be asked : to what end? merely enhancing the role of the sdr would do little either to increase the flexibility of the system or change the incentives of surplus countries. by providing a ready swap of existing reserve currencies into a broader basket, sdr reserves could also further displace adjustment onto other freely trading currencies, thus exacerbating the imbalances in the current system. indeed, by providing instant diversification, sdr reserves could entrench some of the existing strategies of surplus countries. this would change if the proposal were taken to its logical extreme : the sdr as the single global currency. setting aside the fact that the world is not an optimum currency area ( not however, network externalities and transactions costs would work against multiple reserve currencies, as they did during bi - metallism and the pound / dollar period under the gold standard. the well - known triffin ( 1960 ) dilemma, which argued that, in order for the global economy to have sufficient liquidity, the united states had to run balance - of - payments deficits ; but such deficits could undermine confidence in convertibility. bordo ( 1993 ) rightly notes that under flexible exchange rates, the triffin dilemma disappears, as any adjustment could occur through capital flows ( for example, india has accumulated desired foreign reserves, through capital inflows, despite a current account deficit ). recall that under the gold exchange standard, 40 per cent of money supply was backed by gold. zhou ( 2009 ) ; united nations ( 2009 ). least due to the absence of free mobility of labour, goods, and capital ), this appears utopian. while the level of international co - operation has certainly increased since the crisis, it would be a stretch to assert that there is any appetite for the creation of the independent global central bank that would be required. 13 as a result, any future sdr issuance is likely to be ad hoc. 14 a substitution account greater use of sdrs might