use of another country's currency ( " dollarization " ), or a full monetary union. pegged exchange rates that can be adjusted ( that is, revalued or devalued ) have been the most widely used anchor since the second world war. they were the prevailing order under the bretton woods system, which was established after the war and lasted until the early 1970s, when it finally collapsed in the face of increasingly open financial markets, large capital flows, and u. s. expansionary policies. the problem with a fixed, but adjustable, exchange rate is that it does not guarantee that the value of the currency relative to other currencies, and thus its purchasing power, will not rise or fall. for example, the currency could come under downward pressure if it is pegged at a level that is out of line with the country's economic situation ( say, because of large and growing fiscal deficits and debts ). should the markets then begin to question the authorities'commitment to the peg, domestic and foreign investors would scramble to get out, triggering a currency crisis. there is no shortage of such examples in recent history : repeated episodes in latin america since the 1980s, crises in europe in 1992 and 1993, and in southeast asia and russia in 1997 – 98. because pegs have proven problematic, a more realistic approach would involve adopting one of the more rigid fixes. i will have more to say about this later. but let me move on now to the third option for an explicit monetary policy anchor – inflation targets.... targeting inflation among a number of industrialized countries that, like canada, are operating a floating currency, there has been a tendency over the past decade to adopt explicit inflation targets as the anchor for monetary policy. the same tendency is now evident among a growing number of emerging - market economies that have recently moved to flexible exchange rates following the collapse of their pegged rates. the objective is to consistently maintain low and stable inflation, while the flexible exchange rate helps the economy to adjust to shocks. why inflation targets and how do they work to guide monetary policy? in such a framework, the central bank targets the rate of inflation – say, 2 per cent – several quarters ahead. then, based on its judgment of the current and projected strength of demand relative to the economy's production capacity, as well as the implications for future inflation relative to the target, it will take action now – because of the long lags involved

stephen s poloz : summary of the latest monetary policy report opening statement by mr stephen s poloz, governor of the bank of canada, at the press conference following the release of the monetary policy report, ottawa, ontario, 22 january 2014. * * * good morning. tiff and i are pleased to be here with you today to discuss the january monetary policy report, which the bank published this morning. before we take your questions, allow me to note the highlights of the report. • inflation in canada has moved further below the 2 per cent target. this is due largely to significant excess supply in the economy and heightened competition in the retail sector. the path for inflation is now expected to be lower than previously anticipated for most of the projection period. • the bank expects inflation to return to the 2 per cent target in two years or so, as the effects of retail competition dissipate and excess capacity is absorbed. • the global economy is expected to strengthen over the next two years, rising from 2. 9 per cent growth in 2013 to 3. 4 per cent in 2014 and 3. 7 per cent in 2015. • the united states will lead the way, helped by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. the improving u. s. outlook is affecting global bond, equity, and currency markets. • growth in other regions is evolving largely as projected in october. • global trade growth plunged after 2011, but is poised to recover as global demand strengthens. • in canada, economic growth improved in the second half of 2013. however, there have been few signs of the anticipated rebalancing towards exports and business investment. • while we are doing more work to understand the wedge between the level of canadian exports and that of foreign demand, this remains difficult to explain. we are therefore taking a conservative approach to our forecasts for exports, and assuming the wedge will remain. • that said, the u. s. recovery is becoming more broad - based, including higher investment spending by companies, and that, as well as the recent depreciation of the canadian dollar, should help to boost exports. this, in turn, should lead to stronger business confidence and investment here in canada. • meanwhile, recent data have been consistent with the bank ’ s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income. • real gdp growth is projected to pick up from 1.