the aftermath of the crash of 1929, it simultaneously sterilized the resulting large gold inflows. in 1931, to counteract the outflow of gold ( due to the u. k.'s decision to leave gold ), the fed sharply raised its rediscount rate. this effort to maintain confidence in convertibility resulted in considerable monetary tightening and, consequently, a further wave of bank failures in the ensuing six months. article iv ( iii ) states that members should " avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members …. ". unfortunately, this trend has been far from universal. in many respects, the recent crisis represents a classic example of asymmetric adjustment. some major economies have frustrated real exchange rate adjustments by accumulating enormous foreign reserves and sterilizing the inflows. while their initial objective was to self - insure against future crises, reserve accumulation soon outstripped these requirements ( table 1 ). in some cases, persistent exchange rate intervention has served primarily to maintain undervalued exchange rates and promote export - led growth. indeed, given the scale of its economic miracle, it is remarkable that china's real effective exchange rate has not appreciated since 1990 ( chart 2 ). this flip side of these imbalances was a large current account deficit in the united states, which was reinforced by expansionary u. s. monetary and fiscal policies in the wake of the 2001 recession. in combination with high savings rates in east asia, these policies generated large global imbalances and massive capital flows, creating the " conundrum " of very low long - term interest rates, which, in turn, fed the search for yield and excessive leverage. while concerns over global imbalances were frequently expressed in the run - up to the crisis, the international monetary system once again failed to promote the actions needed to address the problem. vulnerabilities simply grew until the breaking point. some pressures remain. the financial crisis could have long - lasting effects on the composition and rate of global economic growth. 8 since divergent growth and inflation prospects require different policy mixes, it is unlikely that monetary policy suitable for united states will be appropriate for most other countries. however, those countries with relatively fixed exchange rates and relatively open capital accounts are acting as if it is. if this divergence in optimal monetary policy stance increases, the strains on the system will grow

david dodge : recent review of the canadian economy opening statement by mr david dodge, governor of the bank of canada, to the senate committee on banking, trade and commerce, ottawa, 24 november 2004. * * * good afternoon, mr. chairman and members of the committee. we appreciate the opportunity to meet with this committee twice a year, following the release of our monetary policy reports. these meetings help us keep parliamentarians and, through you, all canadians informed about the bank ’ s views on the economy, and about the objective of monetary policy and the actions we take to achieve it. when paul and i appeared before this committee last april, we told you that we judged the economy to be operating significantly below its potential. that is no longer the case. the canadian economy grew faster in the first half of the year than we had projected, largely because of a surge in exports. the economy is now operating near its production capacity and continues to adjust to global developments. our latest monetary policy report, released on 21 october, presents the bank ’ s base - case projection for the period to the end of 2006. it calls for aggregate demand for canadian goods and services to expand, on average, at about the same rate as potential output. given the effects of higher oil prices and the past appreciation of the canadian dollar, economic growth in the report is projected to be slightly less than 3 per cent in 2005, and slightly more than 3 per cent in 2006. with the economy expected to remain near its production capacity throughout this period, core inflation is projected to move back up from the current level of 1. 4 per cent to the 2 per cent target by the end of 2005. this is essentially the same projection that we made last april. however, in october we expected that total cpi inflation would rise to near the top of the 1 to 3 per cent target range in the first half of 2005 before falling slightly below core inflation in early 2006. this projection incorporates the path suggested by futures prices for crude oil in mid - october, when we finalized the report. it is against that background, that the bank raised the target for the overnight rate to 2. 5 per cent on 19 october, our most recent fixed announcement date. the base - case projection in our october report assumes further reduction of monetary stimulus over time, to keep the economy near its production potential and to achieve the inflation target. we also emphasized that the pace of interest rate increases will depend on the bank ’ s continuing assessment of the prospects