. a key element of our monetary policy framework is the floating exchange rate. let me be clear : we do not have a target or preferred exchange rate for the canadian dollar. but it is an important relative price in our economy. in terms of the bank's monetary policy, exchange rate movements give us information about economic developments that may be having a direct impact on demand in the canadian economy. and the movements themselves have their own effect on demand, by changing relative prices for canadian goods and services and by shifting demand between domestic and foreign products. the challenge for the bank is to evaluate these movements, together with other data, and set a course for monetary policy that works to keep demand and supply in balance and inflation on target. when the canadian dollar rises or falls, we try to determine how much of that movement is due to changes in world demand for our goods and services, and how much is due to other unrelated factors. it is important that we understand the causes of exchange rate movements, because the implications for the economy — and the appropriate monetary policy response — depend on the cause of the change. we set out a fairly detailed explanation of this in our january 2005 monetary policy report update, which is included in your package. that's a very quick look at our framework. now, let me apply that framework to our current situation. i am sure that the members of the committee are well aware of the global forces that are affecting not just canadian manufacturers, but the entire economy. in the past few years, we have had extraordinarily strong global economic growth. there has also been an unusually high amount of liquidity in the global economy, which central banks are now in the process of removing. meanwhile, we have seen a persistent and growing current account deficit in the united states, mirrored by large and growing current account surpluses elsewhere, especially in asia and among many oil - exporting countries. these imbalances reflect the financial flows associated with mismatches in savings and investment on a global scale. we have also seen the emergence of china and india as economic powerhouses. the strong growth in these countries and other emerging - market economies has led to sharply higher prices for many of the products that canada produces. at the same time, intense competition from manufacturers around the world has led to lower prices for many consumer durable and semi - durable goods. all of this has resulted in an improvement in our terms of trade and higher incomes for canadians — particularly for producers of commodities, metal

in which many of you are involved - have done a good job of matching international savings flows with investment opportunities. international capital flows are the lifeblood of the global economy. however, the sheer size of these financial flows into the united states is not sustainable indefinitely. we know that u. s. external indebtedness - even with that country's reserve - currency status - cannot keep growing forever. this is especially so given that this borrowing is being used mainly to finance current consumption. we also know that in many places outside the united states - particularly in asia and in many oilexporting countries - households currently want to save more than businesses want to invest. at the same time, desired national savings in the united states are not sufficient to meet desired investment, although it is not certain that this situation will persist. eventually, domestic savings in the united states will have to increase. should that occur suddenly, we could see global economic growth slow sharply, unless there was corresponding growth in domestic demand outside the united states. such a slowdown in growth, in turn, raises the risk that policy - makers might resort to protectionism. in that event, a period of very slow growth could, perhaps, be punctuated by periods of outright recession. i hasten to add that this is not a prediction on my part. i am only saying that such an outcome could be the consequence of inappropriate policies in many economies. and this outcome would hurt all countries, including those that are following appropriate policies. global imbalances are a global problem, and we need to think about them collectively. so how can we achieve their orderly resolution? let me spend a few minutes talking about what is needed, both domestically and internationally, to help resolve the imbalances. appropriate domestic policies support confidence one of the keys to changing the flows of global savings and investment is for each country to follow policies that have the best chance of achieving sustained growth in the medium term. the best way to ensure that global demand continues to grow over time is for policy - makers to provide an environment that gives households the confidence to spend and businesses the confidence to invest. if all countries were to follow appropriate domestic policies, this would go a long way towards defusing the danger posed by global imbalances. specifically, in terms of fiscal policy, there is a clear need for countries to focus on having a sustainable ratio of public debt to gdp. this would give confidence to businesses and consumers that the value of their money will not