changes in the prices of those products. the second type does not reflect a direct change in the demand for canadian products. instead, it may reflect a portfolio adjustment - in favour of, or away from, canadian financial assets. or it may be part of a broader realignment of major currencies that is required to resolve the global imbalances ( by which i mean the persistent large u. s. current account deficit mirrored by large surpluses elsewhere, notably in asia and in many oilexporting countries ). let me now relate all this more closely to our recent experience in canada, and explain how monetary policy can be expected to respond to these different types of currency movements. consider the sharp appreciation of the canadian dollar since 2003. this movement has largely reflected strong world demand and prices for our energy and non - energy commodities. in this case, the higher canadian dollar has been working to dampen the initial increase in demand for our products and to encourage a rotation of economic activity towards commodities. to the extent that the dampening effect of the appreciation on aggregate demand exactly offsets the initial increase in demand, thereby keeping overall supply and demand in balance, there would be no need for monetary policy to respond. now, consider an upward movement in the canadian dollar that reflects financial market developments that have little to do with an increase in the demand for canadian products. movements reflecting a general weakness of the u. s. dollar against major floating currencies, related to the large global imbalances, are of this type. an appreciation of the canadian dollar reflecting these factors would have a dampening effect on aggregate demand in canada. so, if such a movement persisted, other things equal, there would be a need for offsetting monetary policy action. of course, in practice, it is difficult to gauge precisely the relative importance of these two types of movements. often, they may be concurrent, making it particularly challenging to sort out the implications for the economy and for monetary policy. reduce differences in sectoral and regional economic performance i will now turn to another, not unrelated, issue that some canadians expect us to address. and that is, the notable differences in performance we now see in certain sectors and regions of our economy. to put these trends in perspective, it is important to understand what drives them. the key factors at play here are the strong world demand and prices for energy and non - energy commodities, and the decline in the prices of many manufactured goods, but especially consumer goods,

paul jenkins : what monetary policy can and cannot do remarks by mr paul jenkins, senior deputy governor of the bank of canada, to the canadian institute of actuaries, ottawa, ontario, 29 june 2006. * * * i am very pleased to be here today. as canada's central bank, we are committed to conduct monetary policy in a way that fosters confidence in the value of money. this is our primary responsibility. but the bank has a number of other functions that are very important to economic life in canada. we promote the safety and soundness of the financial system. we supply quality bank notes that are readily accepted without concerns about counterfeiting. we provide efficient and effective central banking and debtmanagement services. and, of course, we communicate our objectives openly and effectively as part of our commitment to be accountable for our actions. today, i will focus on our main function - the conduct of monetary policy. specifically, i want to talk about what monetary policy can do and, by implication, what it cannot do. the bank's monetary policy mandate the bank of canada act of 1934 requires us to " regulate credit and currency in the best interest of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate... fluctuations in the general level of production, trade, prices and employment, so far as it may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of canada. " this is a fairly broad mandate, with multiple policy objectives. so one can understand why people might think that monetary policy can do more than it really can. but why does the preamble say " so far as may be possible within the scope of monetary action? " i believe that this is how the legislators meant to recognize the complexity of the economy and the fact that not all of the policy objectives in the preamble would be achievable through monetary policy action alone. as economists, we deal with this complexity by looking separately at different areas and aspects of the economy - industries, sectors, regions, various demand components such as consumption, investment, government spending, etc. then we add up all this information to get a better overall picture before taking policy action that is appropriate for the economy as a whole. we can use a similar approach with the preamble - pulling apart its various pieces and focusing on them separately. long - run economic performance so let me start with the