bank of canada, we spend a lot of time thinking about confidence, because it is important to the conduct of monetary policy, which is focused on inflation targeting. we aim to keep the trend of inflation at the 2 per cent target midpoint of a 1 to 3 per cent range. when the trend strays away from that midpoint, either upwards or downwards, we take action to return it to 2 per cent over the medium term. we do that by adjusting our target for the overnight interest rate. over the past decade or so, we have successfully kept inflation at around 2 per cent, on average. here ’ s where the confidence factor enters into the equation : canadians now expect that inflation will stay near the target - not just for the near term, but into the future. they believe that the value of their earnings and savings won ’ t be eroded by inflation and that the real burden of their debt won ’ t be increased by deflation. that confidence has paid a real dividend in terms of monetary policy effectiveness. inflation targeting works best when canadians believe that it will work - in other words, when they have confidence that we will keep inflation near the 2 per cent target. with this confidence, inflation and inflation expectations, as well as interest rates, have become more stable - and this benefits the whole economy. how did we achieve this confidence dividend? by establishing a track record of credible, consistent monetary policy, together with greater accountability and transparency. like many other major central banks, we have embraced the notion that monetary policy is more effective when people can understand what their central bank is doing and why. that is the motivation behind our semi - annual monetary policy reports and updates, our eight interest rate announcements every year, and our many public appearances and speeches. of course, monetary policy does not function in isolation. it works best when it is complemented by fiscal policies aimed at avoiding deficits and lightening government debt burdens. reducing, and ultimately eliminating, the federal deficit in the 1990s helped canada ’ s international credibility, lowered the risk premium demanded by investors, and gave canada more flexibility to adjust to changing economic circumstances. and continued fiscal prudence has given us the flexibility to weather the recent economic turmoil rather well. canadians have now seen the benefits of low, stable, and predictable inflation, and balanced budgets. and they expect that their central bank and their governments will continue to deliver those benefits through responsible monetary policy and prudent fiscal management. confidence in markets so, good

monetary and fiscal policies deliver a confidence dividend. but, of course, trust and transparency are crucial factors all across the economy and the financial system. we all know that a business will not last long if it squanders the confidence of its customers, suppliers, and investors. the corporate finance and accounting scandals of 2001 and 2002 hurt more than just profits and portfolio gains. they also sideswiped the confidence of financial market participants. the problems that brought down enron, worldcom, and others were not limited to those companies. in fact, the international task force appointed by the international federation of accountants - and chaired by john crow, a former bank of canada governor - correctly notes that enron was the event which, by its sheer size, awoke many to issues that had been significant for some time. what ’ s encouraging is that this awakening has happened quickly and that considerable effort is being made to address those issues and reinforce trust in the financial system. the sarbanes - oxley act in the united states, for example, is aimed at restoring trust in corporate financial reporting. other international efforts are underway to improve both reporting and monitoring of public companies. in canada, federal and provincial governments have been working with the private sector to review and improve the framework governing public companies and capital markets. these initiatives are summarized in a document entitled fostering investor confidence in canadian capital markets, which can be found on the department of finance ’ s web site. efforts are focused on four areas : · improving financial reporting and disclosure ; · enhancing the quality of the audit process ; · strengthening corporate governance and management accountability ; and · toughening enforcement. all of these efforts are aimed at building the confidence needed to allow markets to protect the interests of investors and creditors and to operate efficiently so that businesses can finance their operations at the lowest cost. steps to foster confidence let ’ s look first at what ’ s been done to date to improve financial reporting and disclosure. our system, which has already worked quite well for canadians, is being strengthened. the proposed new changes are aimed at building confidence while keeping compliance costs relatively low. new guidelines on continuous disclosure obligations of public companies are being drafted by the canadian securities administrators. the goal is to implement them by january 2004. there are also new guidelines from the canadian institute of chartered accountants ( cica ) on stock options, financial guarantees, and off - balance - sheet arrangements. and the investment dealers association ( ida ) has developed new rules to promote the independence of financial analysts