growth of the narrow monetary aggregate m1, and the federal government established an antiinflation program in the autumn of 1975, which was in force until 1978. although the controls aspect of this program was aimed at facilitating the transition to lower inflation, the fiscal and monetary policies under the macroeconomic aspect of this program were insufficiently restrictive to achieve permanently lower inflation. overall, through 1982, m1 monetary targeting was not as effective in bringing down inflation as had been anticipated. the links between money growth and inflation over a policy - relevant horizon were not as tight as had been expected. the high interest rate elasticity of money demand meant that interest rates did not have to be raised by much to slow down money growth. and, at times, this problem was compounded by unexpected downward shifts in the desire to hold m1 balances. thus, although the targets for the monetary aggregate were achieved, spending and inflation did not decline as much as had been hoped. in the 1970s, fiscal policy was concentrating on cushioning shocks in a discretionary manner and on expanding the amount of public goods and services. there was little realization that it was going off track when examined from a medium - to long - term perspective. this was partly because real interest rates were very low ( and, indeed, often negative ) throughout the decade. this situation could not last forever, and it did not. once real interest rates returned to higher levels and the economy continued to experience lower trend growth rates, the vicious circle of debt dynamics set in. overall, one can view the period since 1970 as one in which the authorities struggled to establish appropriate medium - term anchors for both monetary and fiscal policies. during this time, they learned about the appropriate interaction between those two policies in the context of economic stabilization and growth under a flexible exchange rate regime. in the rest of this lecture, i will deal with four interrelated topics : the appropriate goals for fiscal and monetary policy, building policy credibility, the appropriate stabilization role for the two policies, and policy co - operation. i will conclude with some thoughts about the future. the appropriate goals and focus for monetary and fiscal policies i will start with the topic of the appropriate goals for monetary and fiscal policies. in the 1970s, it was not only canada, but most industrialized countries, that went off track in terms of their economic performance and budgetary outcomes. the global economic surprises that occurred during the course of the decade were partly to blame. but, more fundamentally, the problem was that central

fiscal policies when talking about coordination and co - operation. as you might remember, policy mix was a hot topic in canada in the late 1980s. that was before we had explicit frameworks for our monetary and fiscal policies. with these frameworks in place, the whole issue of policy mix becomes moot. in particular, interest rates are not adjusted to deal with problems of deficits and debts, and taxes and fiscal spending are not adjusted primarily to achieve an inflation objective. this does not mean, however, that there are no implications for financial and policy variables as a prolonged fiscal tightening puts the economy on a course for a new longer - run equilibrium with a lower debt - to - gdp ratio. all else being equal, the fiscal tightening will initially lead to lower real interest rates and a temporary real depreciation of the canadian dollar, so that interest - rate - sensitive components of gdp and net foreign demand can make up for the loss in domestic demand stemming from the tightening. but as canadian net foreign assets rise, the wealth effect on consumption will become large enough to support demand and to allow the canadian dollar to rise to a permanently higher real value than prior to the change in fiscal policy. related to what i have said about the need for co - operation rather than coordination of policy variables domestically, i would argue that, if each major industrial country had clear medium - term objectives for monetary and fiscal policies, along with transparent frameworks for achieving those objectives, there would be no need or desire to have any strong form of international coordination. again, it would be co - operation in terms of information - sharing that would be important. overall, i believe that the clear longer - term objectives and frameworks of monetary and fiscal policies have created an environment where co - operation in the form of sharing information and analysis is most effective. concluding thoughts just over 25 years ago, in the absence of appropriate anchors, canadian monetary and fiscal policies both went badly off course. it then took 15 to 20 years to establish the appropriate focus for those policies and to bring them back on course. now there are clear monetary and fiscal objectives and clear accountability for meeting those objectives. the transparent framework that has been established will be extremely helpful in meeting the challenges that the future is sure to bring. two of these challenges are already apparent — a possible increase in the trend rate of productivity growth and a slowdown in population growth combined with an aging population. both these factors create uncertainty about the growth and level of production potential of our economy