how changes in fiscal policy will affect demand and inflation, and thus its setting of interest rates. therefore, it is to the mutual benefit of both parties to co - operate in sharing information and analysis as they adjust their policy settings. co - operation between the bank and the federal department of finance occurs on a number of levels. i have frequent discussions with the minister and deputy minister. and there are meetings at the staff level to share, for example, information from economic forecasts, surveys, and contacts with various groups and organizations. one of the key reasons for our regular discussions has been to ensure that each institution understands the details of the framework within which the other one is pursuing its objectives and how this framework is being implemented with respect to current economic surprises. the bank also keeps in close touch with provincial fiscal authorities. thus far, i have not said anything about the appropriate mix of monetary and fiscal policies when talking about coordination and co - operation. quite simply, with explicit frameworks in place for monetary and fiscal policies, the whole issue of policy mix becomes moot. the fiscal and monetary authorities are both adjusting their policy instruments to attain their respective objectives. there is no other mix of interest rates and fiscal thrust that the authorities will perceive as consistent with meeting the monetary and fiscal objectives. concluding thoughts clear monetary and fiscal objectives, combined with clear accountability for meeting those objectives, provide the background for policy co - operation and stabilization in canada. the monetary and fiscal policy frameworks have created an environment where co - operation in the form of sharing information and analysis is most effective. fiscal and monetary credibility is high. in other words, economic agents trust that the monetary authorities and the fiscal authorities will maintain these frameworks. with trust in place and with expectations well anchored, the automatic fiscal stabilizers can be allowed to operate fully and monetary policy actions can be directed to achieving the inflation targets. in addition, when major shocks occur, with trust in place, there can be a temporary overshoot or undershoot of the fiscal or monetary targets without unhinging confidence in the framework or in expectations that the targets will be met over time. i believe that canada ’ s experience and the lessons we have learned about having clear policy objectives and supportive, transparent policy frameworks have broad applicability in open economies with a flexible exchange rate.

level of volatility. this recent decline in volatility has also been seen in the equity indexes of many other countries. but as the chart shows, canada has experienced similarly low levels of stock market volatility in the past, only to see it rebound to the high levels previously experienced. the recent decline in stock market volatility may presage a longer period of reduced volatility - but it's too early to tell. in fact, as kenneth rogoff points out in a recent paper, a decline in short - run business - cycle volatility may not necessarily lead to a decline in asset - price volatility. 4 equity returns, he points out, should depend on long - run expected growth and volatility, and long - run expected volatility - that is to say, uncertainty about long - run growth rates - does not necessarily diminish in proportion to reductions in businesscycle volatility. moreover, lower interest rates and lower risk premiums may make prices for long - term assets, such as stocks and housing, more sensitive to perceived changes in both risk and in the path of future interest rates, thus making these prices more variable. this possibility may, in fact, offset any reduction in financial market volatility that would otherwise stem from reduced macroeconomic volatility. so far, i've focused on the impact that monetary policy and the decline in macroeconomic volatility has had on the volatility of bond markets. but other structural factors in financial markets have also affected financial market volatility. financial market structural factors affecting volatility over the past 25 years, and especially in the past decade, we've seen a good deal of financial and technological innovation in financial markets. this innovation can, over time, help to increase efficiency and reduce volatility. let me mention four aspects that are likely to prove important. rogoff, op. cit. first, innovations in electronic trading and in back - office systems have resulted in lower trading costs and increased price transparency and competition, and, in the end, resulted in greater liquidity. debt and equity markets have seen sharp rises in turnover. increased market liquidity tends to place downward pressure on volatility - prices become less sensitive to large transactions and absorb news more easily. trading in government of canada bonds, to take one example, is at an all - time high, and bid - ask spreads on these bonds are the