david dodge : canada ’ s monetary policy approach : it works for canadians remarks by mr david dodge, governor of the bank of canada, to the edmonton chamber of commerce, edmonton, alberta, 26 june 2001. * * * i welcome this opportunity to talk to you today. in recent months, the debate over canada's exchange rate system has heated up and calls for the adoption of a common currency with the united states have attracted a lot of attention. today, i would like to revisit the issue of the appropriate exchange rate regime for canada and to set out as clearly as possible the bank's position. i propose to frame my discussion in terms of canada's approach to monetary policy. i will conclude with some comments on the current economic situation. the goal of monetary policy and how to achieve it the bank of canada's commitment is to contribute to the economic well - being of canadians. this means conducting monetary policy so that it fosters sustained economic growth – by creating conditions that favour rising output, employment, and incomes, and a stable macroeconomic environment. low, stable, and predictable inflation experience over time and across countries has taught us that the best contribution monetary policy can make to a sound economy is to preserve confidence in the value of money. fundamentally, this means that canadians should be able to count on their central bank to keep future inflation low, stable, and predictable. in this way, they can go confidently about their affairs, making sound economic decisions. this, in turn, should lead to better economic performance nationally. seen in this light, the focus on low inflation is not an end in itself, but rather a means to an end – the end being the advancement of the economic well - being of canadians. of course, a low - inflation policy by itself is not sufficient to guarantee the best economic outcome for canada. fiscal prudence and other policies that aim to improve the structure and flexibility of the economy are also essential. but low inflation provides a crucial underpinning to a well - functioning economy. if the goal of monetary policy is to achieve and preserve low inflation, how would the central bank go about it? anchors for monetary policy when a central bank raises or lowers its key policy interest rate, it sets in motion a series of events that starts with the financial markets, works through changes in spending, output, and employment, and ends with an effect on the rate of inflation. this series of events is known as the transmission mechanism of monetary policy. the

eased from their recent peaks, the bank will need to stay alert to any signs of energy costs spilling over into other consumer prices, and thus putting upward pressure on the trend of inflation. in light of these risks, the bank will have to continue to monitor the situation very carefully. in sum, the bank remains positive about canada's economic prospects. we continue to expect that the economy will grow by between 2 and 3 per cent this year and return to a somewhat higher growth path in 2002. this judgment is based on recent evidence that is broadly in line with the bank's expectations. and it is supported by the marked improvement in our economic fundamentals, which gives canada a very good chance to weather the current economic difficulties.