we worry as much about inflation falling below the target as we do about it rising above the target. through most of the last decade, we have succeeded in keeping inflation close to the target. and so, canadians'expectations for inflation have become anchored around 2 per cent. all this has helped to smooth out the ups and downs in the economy and to create the best possible environment for longer - term economic growth. this framework may sound simple in theory. but it is quite complex in practice. our monetary policy decisions are based on economic projections, which can always be thrown off by unforeseen events. because monetary policy actions take time to have their full impact on the economy, we must aim these actions at where we see the economy sitting 18 to 24 months into the future. in doing so, we are always looking at what is called the output gap - the difference between the actual level of production in the economy and the level of potential output. if the economy is operating above its potential capacity and inflation appears likely to be above target in the future, then we would tighten monetary policy. this would cool demand and bring inflation back down to the target. on the other hand, if the economy is operating below its potential capacity and inflation appears likely to be below target in the future, we would ease monetary policy in order to stimulate demand, close the output gap, and bring inflation back to its target. this means that we are always looking at demand and supply in the economy and trying to bring them into balance. so, in carrying out our policy, a large part of the analysis we do is concerned with the many factors that can influence demand and supply. the most important factor is, of course, the strength of domestic demand. but canada is a trading nation, and so the strength of world demand is also important to us. in particular, the united states is a major customer for canadian goods, so we closely monitor the health of the u. s. economy. economic activity is also affected by movements in exchange rates. as you well know, there has recently been a significant adjustment in the value of the u. s. dollar against major currencies, including the canadian dollar. as always, we need to understand the causes of this movement, as well as its effect on the canadian economy. furthermore, movements in exchange rates have a direct effect on the prices of traded goods and services and, therefore, on inflation. however, our research has shown that, in economies such as canada

revenues and lower debt - servicing costs, in turn, led to an even better fiscal position. earlier this year, canadian finance minister john manley announced a sixth consecutive surplus in the federal budget and projected that the budget will continue to be balanced this year and next, despite slower - than - expected growth. the federal government is committed to following a prudent path for its budget planning. canada is expected to have one of the lowest debt burdens in the g - 7 this year. not only have we reduced the debt - to - gdp ratio, but we have paid down almost $ 50 billion of federal debt. this has freed up about $ 3 billion of resources every year for the federal government. the main point is that, while the initial work of fiscal consolidation is certainly difficult, it is necessary in order to enjoy the dividends later on. concluding remarks these policies i've mentioned - fiscal consolidation ; a monetary policy focused on low, stable, and predictable inflation ; and improving flexibility through trade liberalization and structural reform - have all been difficult to implement. putting canada's strong economic policy framework into place involved short - term pain. but our economic performance in recent years is compelling evidence, in my opinion, that these policies are the right ones to follow. i don't want to suggest that we've achieved perfection in canada. far from it. there is much more to be done, particularly in regards to microeconomic policy. nor do i want to suggest that the precise ways in which we've implemented these policies should be followed by every country. instead, the messages i want to leave you with are : that these economic principles are important, and implementing them is difficult, but the economic payoff is ultimately worth the effort. in times of global economic uncertainty, there is a natural tendency to put off difficult reforms or to backtrack on hard - won policy gains. but it is precisely during these difficult times that it is most important to stay the course. canada is committed to staying the course and to building a strong, vibrant, and flexible economy.