money supply. but none of these methods provided a suitable medium - term anchor for inflation expectations. this made it difficult for individuals and businesses to form long - range plans with any degree of certainty. on the fiscal side, the picture was pretty grim at the start of the 1990s and getting worse. public sector deficits would eventually peak at around 8 per cent of canada ’ s gdp, and public debt levels were continuing to mount. clearly, the situation was not sustainable. adjustments were urgently needed. the first of these adjustments came in 1991, when the bank and the government of canada agreed to adopt a series of explicit inflation - control targets. the agreement called for an inflation target - defined in terms of the annual rate of increase of the consumer price index - that descended gradually to 2 per cent, the midpoint of a 1 to 3 per cent range. that initial agreement has been extended three times, with the latest agreement covering the period to the end of 2006. in each case, the midpoint of the inflation - control target range has been kept at 2 per cent. this framework has worked well - better than might have been expected. by january 1992, inflation was already close to 2 per cent, and from the end of 1994 to today, inflation has averaged almost exactly 2 per cent. moreover, not only has inflation fallen, it has become more stable. indeed, the trend of inflation - as measured by what we call core inflation - has stayed within the target range almost continuously for the past 10 years. just as importantly, we found that, after a few years of inflation targeting, the inflation expectations of canadians fell into line with the 2 per cent target. and expectations have remained close to the target in recent years. the point of all this is that we have been successful in using monetary policy to create an economic environment of low, stable, and predictable inflation. with a credible monetary policy, the whole nature of the inflation process has changed. inflation itself has become more stable and, in turn, this has led to a more stable and better - functioning economy. the second big adjustment began in earnest around the middle of the 1990s. as i said before, at that time, canada was facing an unsustainable fiscal situation. compounding this immediate fiscal problem were the looming challenges posed by our aging population. spending had to be put on a viable long - term course, and the ratio of public debt to gdp on a steady downward track. by the middle of the decade, governments

given the tight fiscal policy of the time, the lower dollar - in the context of an easing in monetary policy - played an appropriate role in encouraging foreign demand for canadian products at a time when domestic demand was weak. further, while the lower currency cushioned the shock of falling commodity prices on resource producers, it also boosted the profitability of other sectors that were able to expand in the wake of free - trade agreements and strong foreign demand. this helped to facilitate the transfer of resources within the economy from sectors that were shrinking to those that were growing. the depreciating canadian dollar of the 1990s also changed the relative price of labour and capital. at the time, there was a fair bit of excess labour in the economy, because of the structural adjustments that were taking place. the lower dollar raised the cost of machinery and equipment relative to labour. and that made it easier for some of the labour that was released by the shrinking sectors of the economy to be absorbed by those that were growing. future trends in the economy that ’ s a quick look back at the 1990s. so what can we expect in the future? what are the major issues that we will have to grapple with in the coming decades? what adjustments will be needed? i don ’ t have a crystal ball, but a couple of issues seem fairly clear to me. as i already mentioned, the first important issue is demographics. the canadian economy must prepare for the retirement of the baby boomers. under current projections, canada ’ s working - age population - those 15 to 64 years of age - will start to decline in about 15 years. given this demographic outlook, there are two points to be made. the first is that we need to continue to lower our ratio of public debt to gdp. this will help to ensure that canada will be able to support its growing elderly population. the second point is that we will need to make adjustments to help us deal with a labour force that will soon be shrinking in relative terms and, ultimately, in absolute terms as well. what kinds of adjustments? we will need to make sure that the older segment of the working - age population is not discouraged from participating in the labour force. but more importantly, we need to raise productivity if canadians are to continue to enjoy rising incomes. it will not be easy to get those productivity gains. we will need to see greater investment in new, improved machinery and equipment. we will need to see more and better application of information and communications technology. we