central bankers ’ speeches bank of canada research suggests that the main reason behind these improvements has been the increased sensitivity of provincial population growth to labour market opportunities – canadians are going where the jobs are. 6 finally, wages are flexible in canada. results from the bank of canada ’ s wage setting survey indicate that, while firms are typically reluctant to reduce base wages, incentive pay offers a possible source of downward flexibility in total compensation. 7 about 90 per cent of canadian private sector firms currently use short - term incentive pay plans. 8 such risk sharing is an effective way to maintain employment and profitability during uncertain and volatile times. a resilient financial system an important lesson from europe ’ s experience is the critical role that a sound financial system plays in the monetary policy transmission mechanism. it helps to ensure that changes in central bank policy are transmitted effectively to all regions to support growth and employment. when a sizeable share of a country ’ s banking sector has ( or is perceived to have ) deficient capital and liquidity positions, credit doesn ’ t flow to where it is needed. recent experience in europe has shown the particular problems a monetary union faces when banks become less willing to lend across borders within the union. this fragmentation has reinforced the links between sovereign and bank solvency. as european leaders now recognise, without major reforms to create a banking union, emu is fundamentally weakened. in canada, the existence of largely centralized prudential regulation and deposit insurance pools risk across the country. when combined with a large number of national banking institutions, this greatly reduces the risk that localized economic and financial disruptions impair provincial solvency. since the strength of the canadian banking system has been well documented, i will concentrate on canada ’ s sound regulatory framework. its key elements are : first, supervision is focused and proactive. consolidated prudential supervision is not burdened by other objectives such as the promotion of home ownership or community reinvestment. the staged intervention approach of the office of the superintendent of financial institutions ( osfi ) means it works with institutions to correct problems at an early stage, while they are still manageable. second, efforts to promote financial stability are coordinated. federal authorities consistently share information, coordinate actions, and pool advice to the federal government on financial sector policy. most notable in this regard has been a series of actions to slow the rate of increase in household debt. the bank of canada also works with provincial authorities to implement a number of global initiatives. third, canada has clear and

were the end of the story for the world economy, but it would be too simple. there clearly are some important imbalances we still have to contend with, particularly in the united states. the most often mentioned of these are high share prices, the high us dollar and an overhang of capital expenditure, particularly in technology. it is worth looking a little more closely at them. when share prices were on the way up, and setting new highs for the price - earning - ratio, many people were expecting that this would eventually be followed by a crash like 1987, if not one of 1929 proportions. that scenario seems less likely now that we have about 15 months of correction behind us. while the fall in the nasdaq was large enough ( 70 per cent ) to warrant the term " crash ", and its preceding rise the term " bubble ", the share market as a whole has retreated in a more orderly fashion. the fall in the broad indices such as the s & p 500 or the wilshire has been about 20 per cent over the past 15 months, and the price - earning - ratio has come down from a peak of 36 to 26. now, i do not want to get into the business of forecasting future share prices – the only point i wish to make is that the risk of a fall severe enough to frighten people into stopping spending must be smaller now that we have some of the correction behind us, than when we had none. the high level of the us dollar, and the fact that it is still tending to rise, cannot be helpful to the us economy. it must be harming us exporters and those who compete with imports, and no doubt is one of the reasons why us manufacturing output has fallen for each of the past eight months. but these effects on trade flows, while unhelpful to the united states, must be helpful to its trading partners including ourselves. so it is hard to see the trade effects of the strong us dollar being harmful to the world economy as a whole. where the rising dollar is harmful is in reinforcing the widely held view that you cannot go wrong in buying us assets – if their value goes down, at least you will gain on the exchange rate. this sort of thinking does distort capital flows and can lead to misalignments in asset markets. the area where i think a us imbalance is having unfortunate consequences both inside and outside the united states is in physical investment. in the year