to helping achieve the important end goal of low and stable inflation, the inflation target has entailed three additional benefits. first, success in achieving the target has anchored inflation expectations, which in turn helps to keep inflation low and to stabilize the economy. second, an explicit inflation target has made the central bank more accountable, since it provides a concrete objective to account for. third, this accountability for a clear target has in turn encouraged the central bank to be more transparent in its operations and communications. i'll elaborate on the role of increased transparency later in my remarks. since 1995, the inflation target has been the 2 per cent midpoint of a 1 to 3 per cent control range. and since that time, inflation has, in fact, been close to 2 per cent. i think this chart tells a clear and interesting story. as you can see, inflation in canada was high and variable in the 1970s and early 1980s, and then declined in the mid - 1980s and again after 1991. cpi inflation averaged 8. 1 per cent from 1971 to 1980, 6. 0 per cent from 1981 to 1990, and 2. 1 per cent from 1991, when the inflation target was introduced, to the present. i should add that many other countries have also seen a sustained decline in inflation over the past decade and a half. in canada, the variability of inflation, measured by its standard deviation, declined in tandem with the rate of inflation. this pattern of declining volatility was equally true for core inflation and other underlying measures of inflation. low, stable, and - i should emphasize - predictable inflation tends to support sustainable economic growth. let me elaborate on this idea by pointing to three of the macroeconomic benefits that accrued in the 1990s as inflation declined and stabilized close to the 2 per cent target. first, owing to greater certainty about the inflation outlook, there was a decline in the variability of relative wages, and thus a better allocation of labour. second, we saw longer labour and financial contracts, with lower transaction and bargaining costs for firms and households, and a reduction in time lost to labour disputes. third, there was a reduced need for individuals and businesses to protect themselves from unexpected inflation, resulting in a more appropriate allocation of resources. now let's look at output. one of the most noteworthy macroeconomic stories in recent years has been a significant reduction in the variability of output across most g7 countries, a trend that has come to be called the " great moderation. " in

interest rates to cool off the economy. and when the economy is expected to operate below its production capacity, and inflation is poised to fall below target, the bank will lower interest rates to stimulate growth. we also factor in shocks that directly affect inflation. because we target domestic inflation, we have a floating currency. a central bank cannot successfully control both the domestic and external values of its currency at the same time. and a flexible exchange rate is an important price signal of changing global and domestic circumstances that can help to prompt and facilitate necessary adjustment. this is our paradigm for the conduct of monetary policy, and we have been so transparent about it that we have devoted entire speeches and published a great deal of staff research on the topic. we do this so that a careful observer can understand just how monetary policy will adjust to changing circumstances. our inflation target is established under an agreement with the federal government. when this is reviewed periodically, we look for ways to improve the conduct of monetary policy based on recent experience and research in order to clarify aspects of our framework. in the most recent review, for example, we examined how to deal with asset - price bubbles and looked at the appropriate time horizon for returning inflation to target following an economic or financial shock. in preparation for the next review of our inflation targeting agreement in 2011, we are conducting an intensive research program into possible improvements to our policy framework. specifically, we are looking into the merits of a lower inflation target and price - level targeting. now, let's look at transparency about the inputs, the processes, and the reasoning behind monetary policy decisions. just a little over a decade ago, the bank didn't even issue a press release when it made an interest rate decision. now, our rate announcements are widely anticipated. there is a very high level of interest, stretching from households to office towers, in what the bank of canada has to say on interest rates, inflation, and the economy. this interest is at least partly the result of a series of measures taken by the bank to increase transparency. after the introduction of the inflation target, we moved in 1994 to become more open about how we implement monetary policy by targeting the overnight interest rate. a further major step towards greater transparency came in 1995 when we began to publish a regular monetary policy report, and later added mpr updates, to provide a window for financial markets and the general public into the analysis behind our conduct of monetary policy. soon after that, the bank began to publicly announce interest rate