inflation to target over a horizon of six to eight quarters. however, over the past twenty years, there has been considerable variation in the horizon, in response to varying circumstances and economic shocks. this flexibility is required because, when taking monetary policy actions to stabilize inflation at target, the bank must also manage the volatility that these actions may induce in the economy. these trade - offs will differ depending on the nature and persistence of the shocks buffeting the economy. there are limits to this flexibility. the bank ’ s scope to exercise it is founded on the credibility built up through its demonstrated success in achieving the inflation target. this reinforces the importance of continuing the bank ’ s relentless focus on achieving the 2 per cent inflation target over time. conclusion let me conclude with a quick illustration of how we are applying the framework under current circumstances. as recently as july, markets were expecting the near - term withdrawal of monetary policy stimulus in canada. at that point, the policy interest rate had remained near historic lows for the better part of a year, even after canada had recovered both all of the jobs and all of the output lost during the recession. this degree of stimulus was in part bis central bankers ’ speeches necessitated by the considerable external headwinds facing the canadian economy, including weak u. s. activity and the persistent strength of the canadian dollar. since then, the canadian economy has been hit by major shocks. the global economic outlook has weakened considerably and financial market volatility has increased, owing in particular to the ongoing european sovereign debt crisis. european authorities have announced important plans to provide time to refound their monetary union, but acute strains persist. at this point, the crisis appears barely contained. in canada, total cpi inflation is near the top of the target range, and preliminary evidence suggests that economic growth in the second half of the year will be slightly stronger than the bank had projected in the october monetary policy report. however, as outlined in the october report, a weaker external outlook is expected to dampen growth in canada through financial, confidence and trade channels. domestic demand is expected to remain the primary driver of growth in canada, but these shocks from abroad imply more subdued growth in household expenditures and less vigorous growth in business investment. as a result, the bank continues to expect excess supply in the economy to persist well into 2013. this, along with the reversal of earlier sharp increases in food and energy prices, is expected to push total cpi inflation toward the bottom of the target range

##istic to rely on the federal reserve to act permanently as an international lender of last resort. the imf can enhance its role as a contingent supplier of liquidity. in recent weeks, it has made tangible and sensible improvements to its lending programs by refining its flexible credit line, and adopting new a crisis - prevention instrument, the precautionary credit line. however, there are limits to this approach. as with lender of last resort to private entities, there can be moral hazard when lending to sovereigns. why extend credit to countries that have already bought expensive insurance in the form of foreign - exchange reserves that they do not use? how do you “ lend freely against good collateral ” at the sovereign level? countries can do most of the work themselves. private currency mismatches can be reduced through effective supervision, and measures to enhance the liquidity of local currency funding markets are essential. ultimately, sound monetary policy, sustainable fiscal policy, and robust financial supervision and regulation are the best defences against crises and contagion. conclusion the world ’ s economic centre of gravity is shifting. the effectiveness of the international monetary and financial systems will determine how rapidly this change will occur and how sustainable it will be. the current outlook is for continuation of a modest global recovery, balancing stronger activity in emerging market economies with weaker growth in some advanced economies. however, there are non - negligible risks on the downside. in particular, the current functioning of the international monetary and financial systems is beginning to force a wrenching real adjustment across major economies. renewed weakness in the united states could have important implications for the canadian outlook. in this environment, the bank will have to chart a careful course for canadian monetary policy. any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook. a few months ago, the bank of canada analysed the potential difference between a cooperative path for the global economy based on the g - 20 framework and one in which markets forced fiscal adjustment and little else is changed. we estimated a possible shortfall in global economic output of $ 7 trillion by 2015 ( chart 5 ). since then, the toronto summit secured agreement on many of the right measures to make up this shortfall. however, the only measures that have actually been implemented have been consistent with the deflation path. while the other right promises have been made, conviction is required. adjusting to the current forces in the global economy requires finishing financial reforms, implementing