familiar with it. rather, i intend to focus on what has made this latest episode of global financial turbulence more troublesome than others in recent history. this should help us see recent developments in the canadian economy and in monetary policy in a clearer light. it should also provide some insight on what needs fixing in the international financial system and what mistakes to avoid in the future. so, why has the 1997 – 98 financial turmoil been more widespread and long - lasting? the way i see it, there were two main reasons. first, with the benefit of hindsight, it is clear that too many incautious international portfolio investments were made in the wake of the growing globalization of capital markets. second, it has taken japan much longer than expected to deal with its serious economic and financial problems, problems that long predated the asian crisis. – 2 – let me explain why i think these factors have had such an impact this time around. first, the matter of incautious international investment practices – what was the problem here? with the opening up of financial markets and with the decline in interest rates in industrial countries, a growing number of investors were attracted to higher returns abroad. “ abroad ” often meant the so - called emerging market countries, particularly those in asia. with their rapid rates of economic growth year after year, these countries seemed to have great investment potential. but foreign investments, especially in emerging markets, are far more complex than domestic ones. and assessing these investments can be very tricky. for one thing, investors are dealing with companies operating far away, in a very different economic and political environment. for another, financial regulatory and supervisory practices in some of these countries are less welldeveloped and transparent. in addition, investors may have felt rather well “ protected ” from risks – for a couple of reasons. first, past assistance packages by the international monetary fund ( imf ) and other international agencies may have led them to believe that the international community would always come to the rescue if worst came to worst. second, many investment advisers evidently were not terribly fussed about the exchange rate risk because most asian currencies were fixed to the u. s. dollar. it is all too easy to forget that having a fixed exchange rate is not in and of itself a guarantee that a currency will not decline in value – which in fact is what many of these currencies have done. in the end, huge amounts were placed in emerging markets in the 1990s by mutual funds, pension

price inflation is now well below the core rate of inflation. and in such circumstances, it is equally inappropriate to base our policy actions on swings in total cpi inflation. the slowing economy in the past year let me now look back at a rather difficult year for the economy. during 2001, we lowered interest rates at every fixed announcement date, in order to adjust to the changing economic circumstances. at the beginning of the year, our main concern was the impact that a slowing u. s. economy would have on canada. although domestic demand in canada was holding up, against a backdrop of weaker foreign demand, we lowered our target for the overnight rate through the first half of the year. both the old and new measures of core inflation also remove the effect of changes in indirect taxes. but by mid - summer, evidence began to accumulate that the u. s. slowdown would be more protracted than anticipated, and that economic activity outside north america would be much weaker. at the same time, there were indications that domestic demand in canada, which had held up well through the first part of the year, was softening. so at our 28 august fixed announcement date, we said that we had revised down our expectations for growth. then came the terrorist attacks of 11 september. their immediate impact and subsequent fallout compounded the problems of the economic slowdown. and the attacks presented a pressing challenge to the bank of canada and other central banks : to keep the world's financial systems operating smoothly. one of the bank's key functions is to promote financial stability in canada. that means keeping markets functioning well, even in times of extreme stress, such as the days immediately following 11 september. the bank of canada, as did other central banks around the world, stepped in to provide financial markets with ample access to domestic liquidity. and we reached an agreement with the u. s. federal reserve that would have permitted us to provide extra u. s. - dollar liquidity to canadian banks had it been necessary. in short, we made sure that the disruption did not turn into gridlock. if there was one positive thing to emerge from this terrible event, it was that the global financial system kept running as well as it did. but in the aftermath of these events, we were left with another challenge. that was to try to minimize the economic impact of the attacks. it was obvious that consumer and business confidence would suffer. we needed to do our part to help keep the loss of confidence as small