summer. we expect these imbalances to stabilize and then gradually unwind in coming years. in our base - case scenario, the bank expects a soft landing in housing and a pickup in exports and investment. this rotation will relieve the tension between low demand and household imbalances. nonetheless, the risks around this base case need to be managed. there is a risk that household imbalances could keep building and set the stage for a sharp correction down the road. such a correction would be a risk to both the canadian economy and our financial system. our current monetary policy weighs this risk against the risk of inflation falling even further below target. this zone of balance is relevant today and in prospect, as we expect both risks to diminish over the next two years or so. this is what i mean when i describe monetary policy as an exercise in risk management. credibility counts our flexible inflation - targeting framework gives us the room to manoeuvre in the face of unusual shocks. this only works if expectations are well anchored : the public has to be confident that we will get to the 2 per cent target. our commitment to the inflation target must remain credible. credibility is coin. it is earned only through years of sound policy. without it, low and stable inflation could only be achieved at considerable short - run cost to the economy – as was our experience in the early 1980s, when we tackled runaway inflation. bis central bankers ’ speeches credibility must be employed wisely. we think of it as an investment. by using credibility to exercise the framework ’ s flexibility, we are working to maintain stable financial conditions that will support the expansion of capacity and return the economy to its full potential. as the process unfolds, we anticipate there will be a future payoff of enhanced credibility. as we decide policy, we cannot take credibility for granted ; we must keep earning it by ensuring, first and foremost, that monetary policy remains focused on keeping inflation on target. conclusion let me conclude. i ’ ve described how we manage a menu of risks in our policy decisions : we look at risks through two lenses. we are concerned with the big risks of runaway inflation and deflation and are acting to keep them remote. we have learned, the hard way, that financial stability is a necessary condition for low and stable inflation, and we are working here in canada and around the world to improve the resilience of the financial system. our current monetary policy balances the risk that inflation could

the federal reserve must take an active interest in all the factors that affect economic performance, including business and consumer confidence, economic growth abroad, the foreign exchange value of the dollar, fiscal policy, and, of course, asset prices. we take the level of the stock market into account when we consider the economic outlook and monetary policy. but let me be clear : we do not target a particular level of equity prices. we attempt simply to judge the likely influence of the stock market as well as other important factors on the level of aggregate demand and aggregate supply and, hence, on the economy ’ s ability to achieve price stability and maximum sustainable employment. in this respect, the stock market plays the same role in our analysis as does any other influence on our outlook. while our goal of price stability can foster a favorable environment for business investment, we make no these calculations include both equities held directly and equities owned indirectly through mutual funds, defined contribution pension plans, defined benefit pension plans, life insurance companies, and personal trusts. figures from the 2001 survey of consumer finances are not yet available. pretense to being able to control how that plays out in the stock market. we cannot avoid gauging the effect of the stock market on economic performance, but we do not target stock prices. the dramatic movements in asset prices over the past several years have affected aggregate demand and, to some extent, aggregate supply in the united states. in the late 1990s, the growth rate of u. s. labor productivity increased beyond the expectations of most observers. an important source of the faster pace of productivity was a surge in capital spending fostered by the development of new technology. faster productivity growth was among the factors that boosted equity valuations ; in turn, larger expected productivity advances and a lower cost of equity capital provided a further stimulus to investment. the pickup in investment combined with the wealth effect on consumption to boost aggregate demand. the rapid pace of investment also helped to hold down inflationary pressures by increasing the growth of productive capacity. however, by the summer of 1999, the persistent strength of domestic demand and tightening resource utilization in the united states, especially for labor, heightened concern among policymakers that inflationary pressures could undermine the impressive performance of the economy. accordingly, the federal reserve raised short - term interest rates. the objective was not to bring down the stock market but rather to bring the growth of aggregate demand and aggregate supply into better alignment. of course, the u. s. economy has