mr. thiessen looks at the recent economic record in canada and the challenges ahead for monetary policy notes for remarks by mr. gordon thiessen, governor of the bank of canada, to the new england - canadian business council in boston, usa, on 16 / 9 / 97. it has been a little over two years since my last public speech to an audience in the united states. during this time, a lot has happened in terms of economic developments in our two countries. one thing that continues to impress me is the remarkable performance of the u. s. economy, which has achieved six years of steady economic expansion, with high rates of job creation and low inflation. as a neighbour and major trading partner, canada has certainly benefited from the strong u. s. economy. but i think that what is happening in the united states is relevant to canada in other ways. first, it offers a yardstick that we canadians often use to judge the performance of our own economy. second, as the unused capacity in the canadian economy is gradually absorbed, monetary policy in canada will be facing challenges similar to those that the federal reserve has had to confront in trying to steer the u. s. economy on a path of durable, non - inflationary expansion. the recent u. s. experience in this area is, therefore, particularly interesting for us. today, i would like to discuss the recent economic record in canada and the challenges ahead for monetary policy. in doing so, i will emphasize the bank of canada ’ s continued commitment to explicit targets for keeping inflation low. along with their other benefits, these targets help anchor market expectations about future movements in the exchange rate. the role of the exchange rate in the operation of canadian monetary policy is another topic i will discuss today. the recent economic record in canada let us first take a quick look at how the canadian economy has performed in the recent past, in comparative terms. in terms of economic growth and job creation, there is no doubt that canada has not done as well as the united states in the 1990s. and even though, in my view, there are good explanations for this, the fact remains that canada has some catching up to do in this regard. why has the growth in output and employment been more modest in canada than in the united states in recent years? i believe that the reasons lie in the major transformation that the canadian economy has been going through since the beginning of this decade. this transformation has been in response both to the universal

given the past success of the us monetary authorities in keeping inflation under control and their resolve to continue to do so. nonetheless, it is important that we be prepared for all contingencies. the first thing the bank of canada would have to do in such a case is to ensure that the us inflation psychology did not cross our borders. that would mean making it absolutely clear that we would strongly resist movements in the underlying rate of inflation in canada that risked taking it outside our target range. once it became evident that the us inflation rate was persistently rising relative to ours, the canadian dollar should start to rise in value against its us counterpart. indeed, with such an adjustment in the canadian dollar, our floating exchange rate would be playing its proper role in providing an important element of insulation for canada from those rising us prices. and monetary policy should be ready to encourage that process, if necessary, to prevent a spillover of inflation. you would be right to gather from what i have said so far that the best news we can all hope for is a “ goldilocks ” us economy - not too hot, not too cold. this basically means an economy that slows down to a steady, sustainable pace of expansion that keeps it off the boom - and - bust roller - coaster. the second challenge i want to talk about today is how canadian monetary policy should operate as our economy gets close to the full use of its production resources. whether because of persistent us demand for our exports or strong momentum in spending by canadian households and businesses, we will very soon reach levels of economic activity that, based on typical measures of our production potential, appear to be at full capacity. ideally, we want to see the economy operating at a level that is as close as possible to full potential. at this level, the economy can deliver a low and stable rate of inflation - one that is neither rising nor falling persistently. and economic activity is expanding at as rapid a pace as is sustainable over time. unfortunately, in practice, it is very difficult to estimate precisely where this ideal operating level is. and this gets to be even trickier after a period of business restructuring, rapid technological change, and strong business investment in plant and equipment. this is what happened in canada during the 1990s. and it may have raised our economy ’ s production capacity, although we cannot be sure by how much. given the current momentum in our economy and the high levels of activity that we are seeing, and because of the uncertainty surrounding