countries, we have chosen an intermediate solution. interest rates are changed more gradually with less impact on output than under a strict inflation target, and inflation is allowed to deviate from the target over a somewhat longer period. this is called flexible inflation targeting. ( see for example svensson ( 2000 ). ) flexible inflation targeting both provides the economy with a nominal anchor and contributes to smoothing fluctuations in output and employment. in the countries that normally figure in our comparisons, the responsibility for monetary policy has now been delegated to a central bank. the first and most widely known examples of independent central banks are the bundesbank and the federal reserve. the delegation of monetary policy decisions to an independent central bank also finds support in economic theory. it contributes to securing credibility, confidence and consistency because an independent central bank must adhere to its mandate. this increases the scope for monetary policy to contribute to stability. for a discussion of central bank independence, see hylland ( 2000 ). the benefits of autonomy are related to the way in which it induces economic agents to look ahead when making decisions. they take into account economic policy as they expect it will be tomorrow and the day after. it is thus important that the authorities do not sow doubt, but on the contrary act in a predictable manner within a long - term framework. the authorities must be credible and inspire confidence. there must be consistency between the stated objectives of economic policy and what is actually done to achieve them. this is the most important reason why the implementation of monetary policy has been delegated to central banks. in norway, the responsibility for interest rate decisions was delegated to norges bank in 1986. the differential between norwegian and german implied forward rates 10 years ahead provides an indication of how successful we have been in creating confidence that we will attain the inflation target. implied forward rates are calculated using the yield curve and can be interpreted as the expected three - month rate ten years ahead. the forward rate differential can be interpreted as the expected inflation differential in the long term plus a risk premium. in the euro area, the objective is to keep inflation below 2 per cent. if we assume that this gives an average inflation rate of 1½ per cent, the inflation differential against norway will be about 1 percentage point. this means that an investor that is seeking the same real return must have a one percentage point higher interest rate in norway than in germany. after the introduction of the inflation target, the differential between german and norwegian forward rates remained at about 1

to 3 per cent. to increase the chances that inflation stays inside that range, the bank will now be aiming expressly at the 2 per cent midpoint. moreover, the new agreement runs for five years, instead of three, to the end of 2006. both of these changes should help to increase predictability and to reassure canadians that low inflation will be a continuing feature of the domestic economic scene. now, let us see how the exchange rate fits in all this and why canada needs a floating currency. why do we need a floating exchange rate? if we want to set our own goal for inflation or, what's more relevant ( since today all industrial countries pursue a similar low - inflation objective ), if we want to run a monetary policy suited to our own distinct economic circumstances, we need monetary independence. monetary independence can exist only within a flexible exchange rate system. the real value of a floating currency for canada lies in helping our economy to absorb some of the impact of external shocks. a classic example would be a sharp movement in the value of our exports relative to our imports, such as occurred in 1997 – 98, when world commodity prices plummeted in the wake of the asian crisis. in that instance, a downward movement in the value of the canadian dollar helped offset some of the losses suffered by our commodity producers. more importantly, it strengthened the competitiveness of canadian manufacturers. they, in turn, were able to expand production and offset some of the downward pressure on output and incomes from the decline in the commodity sector. in this way, our national economy was able to adjust more quickly, and with less overall fluctuation in output and employment, than if the exchange rate did not move. consider what would have happened under a fixed exchange rate. with the exchange rate not allowed to move, domestic wages and prices would have had to decline to restore external competitiveness. and since neither wages nor prices are flexible enough to adjust quickly, much of that adjustment would have had to come through declines in output and employment. in a world where capital is free to move across national borders, a floating exchange rate can also help to absorb some of the pressures stemming from large capital flows and to facilitate any necessary economic adjustments. indeed, i would remind you that the decision to float the canadian dollar in 1950, and again in 1970, was taken in the context of large capital inflows ( and rising commodity prices ) that were causing concerns about their inflationary effects on our economy and were putting