mr. thiessen discusses the canadian experience with targets for inflation control text of the 1998 gibson lecture by the governor of the bank of canada, mr. gordon thiessen, at queen ’ s university in kingston, ontario on 15 / 10 / 98 ( charts and references omitted ). it is an honour to have been asked by the school of policy studies and the john deutsch institute to deliver the 1998 gibson lecture. as an economist who worked as a banker for most of his career, douglas gibson brought an interesting perspective to public policy issues, to the relationship between government and business, and to the contribution of outside economists to government policies. i noted with particular interest a comment by gibson in his 1981 essay in honour of john deutsch. he points out that few academic economists in canada up to that time “ appeared to appreciate the destructive influence of inflation on the economy and on society ”. 1 that comment provides a convenient link to my topic for this year's gibson lecture. what i propose to do is to reflect on canada's experience using explicit targets aimed at low rates of inflation as the focus for conducting monetary policy. 2 but let me first set the scene by putting the inflation targets in the context of various approaches to monetary policy. with the sharp rise in worldwide inflation in the 1970s, the costs of inflation became more and more evident. consequently, central banks increasingly focused their attention on how to get inflation down and keep it down. one lesson that came out of this period was the importance of having some sort of “ nominal anchor ” to ensure that monetary policy does not lose sight of the objective of inflation control, given the long lags in the operation of monetary policy. 3 the traditional nominal anchor for small countries has been a fixed exchange rate that links the currency of the small country to that of a larger trading partner that has been successful in controlling inflation. among the larger countries, many central banks turned to monetary aggregates as an intermediate target for monetary policy around the mid - 1970s as relatively high inflation became entrenched in the world economy. subsequently, with inflation and inflation expectations persisting at uncomfortable levels in many countries during the 1980s, the policy innovation in the early 1990s was the introduction of explicit inflation - control targets in eight countries. 4 the main factor that countries choosing to use explicit inflation - control targets have in common is a history of higher - than - average inflation. in some cases, they had previously used monetary aggregates and / or a fixed exchange rate

followed by an economic update speech, where a member of our governing council explains how we considered the key elements related to the economic outlook in our decision - making process. yesterday, the bank maintained its policy interest rate. the ongoing backdrop for these policy rate discussions is a canadian economy that, after some challenging years in the wake of the oil price shock, is operating near its potential and inflation that is very close to our 2 per cent target. here in the province of quebec, growth was above 3 per cent last year — its best performance in more than 15 years. the broad - based growth since the beginning of 2017, and its implications for inflation, has led us to raise the policy interest rate three times since july. with the economy facing uncertainty on a few fronts, each decision, including yesterday ’ s, is less straightforward than the picture i just painted might suggest. the context for the decision before diving deeper into the economic environment we are operating in, let me remind you what we are trying to achieve and how we do it. the bank targets an inflation rate of 2 per cent, within a band of 1 to 3 per cent. it is worth noting that inflation has averaged close to 2 per cent in the past 25 years, and that this success can be attributed in part to our policy, adding to its credibility and increasing public trust in our framework. to reach our goal sustainably, aggregate demand in the economy must be in balance with aggregate supply. our main tool for achieving this is the policy interest rate, which allows us to stimulate or temper demand. the policy interest rate is currently below our estimate for the “ neutral ” rate — that is, the equilibrium interest rate when inflation is at target and the economy is growing at potential, once the effects of any shocks have faded. that means our policy stance remains accommodative. another way to see this is by noting that once adjusted for inflation, our real policy rate is - 0. 75 per cent. our accommodative stance reflects the presence of some factors that continue to weigh on the economy and, in turn, on our forecast for inflation. for example, two such factors are the uncertainty surrounding trade policy, which is restraining business investment, and the impact of the new mortgage financing guidelines on housing activity. with this context in mind, i will share our assessment of global and canadian economic developments and elaborate on the issues that we are watching closely. - 3global economic developments and exports first, let me