the two economies often require very different adjustments to shocks. canada ’ s floating exchange rate facilitates these adjustments by reducing the amount of lost income and output during the adjustment process. weighing the costs and benefits our empirical analysis shows that these adjustment benefits are quite large during periods of significant shocks. but there is no free lunch. there are costs involved in choosing a floating currency, and these could be avoided under dollarization. these include the costs of currency transactions and the need to mitigate currency risk - costs that can be considerable. at the present time, however, the adjustment benefits clearly outweigh the costs. this is an empirical statement, not a philosophical one. it is possible that, at some future time, the structures of our two economies could converge to the point that the reverse would be true. but for now, and as far into the future as i can see, the floating exchange rate is the best choice for canada given the degree of integration of the canadian and u. s. markets for goods and services and labour. the question can then be asked : “ would further integration of canadian and u. s. markets change this assessment? ” the fact that the structures of the canadian and u. s. economies are so different argues against using the same currency. but this could conceivably be overcome if there was much greater integration of all markets between canada and the united states. it is this integration that could help us reduce the costs of adjusting to shocks that i described earlier. specifically, the markets for goods and services, and particularly for labour, would need to become much more unified with those in the united states before it would make economic sense to adopt the u. s. dollar. right now, our capital markets are fairly well integrated. our markets for goods and services are supposed to be deeply integrated under nafta. but as any exporter will tell you, we are not quite there. there is always the threat that the united states could take a countervailing or antidumping action. in addition, nafta does not cover all goods and services. still, by far the largest problem is the labour market. wages tend to be “ sticky ” ; that is, adjusting wages often takes time. so, under dollarization, the brunt of the economic adjustment to shocks would be borne by the labour market. this would create a huge problem if workers were not free to move across the border in both directions. at times it would create periods of much

get to the underlying trends in the economy. and, as always, we will look at the complete economic picture as we lead up to our next decision date on 11 july, and we will present that complete picture in our monetary policy report update two days later. conclusion let me conclude. powerful global economic forces have been affecting the canadian economy and will continue to have an impact for the foreseeable future. adjustment must take place. it hasn't been easy, and it hasn't been without pain. and adjustment won't be easy in the months and years ahead. but i'm encouraged to see that most firms are getting on with the job. i encourage you to persevere with these adjustments. for our part, we remain committed to keeping inflation low, stable, and predictable. that is the best contribution we can make to helping output and employment remain strong.