david dodge : the strength and resiliency of the canadian economy notes for remarks by mr david dodge, governor of the bank of canada, on behalf of the canadian minister of finance, mr ralph goodale, to the german - canadian business club of berlin - brandenburg - association of berlin merchants and industrialists, berlin, 22 november 2004. * * * it is an honour to be with you today. as you may know, this is the second time that i have visited berlin. in june 2003, i had the honour to speak at this group ’ s founding ceremony in my role as the governor of the bank of canada on the need, based on canada ’ s experience, for a solid economic policy during uncertain times. i have very fond memories of this visit and i am pleased to see so many familiar faces today. since that time you have made great efforts to promote strong german - canadian trade relations and build a better understanding of the economic and social conditions in both of our countries. today i would like to speak to you on behalf of canada ’ s minister of finance, ralph goodale, who sincerely regrets not being able to be with you today. in his economic and fiscal update november 16, minister goodale described the remarkable strength and resiliency of the canadian economy following numerous shocks in 2003, including sars, a single, isolated case of “ mad cow ” disease and the strong appreciation of the canadian dollar. canada weathered this period of economic slowdown, and has recovered from relatively weak growth of two per cent in 2003. in fact, canada saw growth of 3. 4 per cent in the first half of the year - much stronger than expected. private sector forecasters now expect growth of three per cent for all of 2004, and 3. 2 per cent growth in 2005. in the bank of canada ’ s recent monetary policy report, the bank projects economic growth of 2. 9 per cent in 2005 and 3. 2 per cent in 2006. the origins of this success can be found in policies that began a decade ago. in 1993 canada had the second - worst government debt - to - gdp ratio among g - 7 countries. it had high unemployment. it had low productivity growth. federal debt servicing costs were absorbing 38 cents of every dollar of government revenue. this situation was clearly unsustainable, and many difficult and unpopular decisions had to be taken to clean up public sector balance sheets during the 1990s. in 1994 the government launched a series of expenditure reductions which, by

to guard against overreactions that could unnecessarily raise the costs of the intervention and potentially crowd out private agents. third, interventions should be targeted. a central bank should attempt to mitigate only those market failures that it is best placed to rectify. specifically, central banks should concentrate on liquidity disruptions which, by their nature, are not permanent. fourth, intervention tools should be well - designed for the job at hand ; that is, lending at a penalty rate to particular institutions is appropriate for institution - specific liquidity problems. market - specific liquidity problems should be addressed with market transactions at competitive prices. finally, when there are shortages of collateral, market transactions should be conducted in that collateral. 8 in these regards, along with traditional central bank tools, such as lender - of - last - resort arrangements, a range of facilities is likely necessary. each of these has distinct characteristics suitable for different circumstances. term purchase and resale agreements could be offered to any financial market participant with marketable securities as the basis for the transaction. this type of transaction would be most useful when liquidity premia in money markets were distorted and associated with widespread liquidity problems in a particular asset class or maturity. term securities lending would increase the supply of high - quality securities that could be used for collateral at times when such collateral was in short supply. the bank of canada is currently constrained in its ability to ease collateral shortages, however, legislation currently before parliament would address this issue. it could also allow for a direct exchange of less - liquid securities for those that are more liquid, thus reducing the incentive to hoard precautionary liquidity. term loan facilities could be most useful when liquidity premia in money markets were distorted because several financial institutions were facing liquidity shortages. fifth, and finally, interventions should not create further market distortions. transactions should, to the extent possible, take place at market - determined prices and under conditions that are aligned with those in the market. this limits the possibility that the central bank will crowd out the return of markets. this is an important point, on which i will expand. under most circumstances, central bank provision of liquidity should be priced at an auction, where prices are set competitively, so that funding markets for the assets involved would not normally be distorted. a well - designed auction process can help institutions avoid any stigma associated with the receipt of central bank liquidity and minimize the possibility of confusion about lending at rates that