though their economies had been strengthening, at least until recently. in particular, there has been much - 4debate about the continued existence of what economists call the phillips curve. this is the idea that there is a close link between economic growth and inflationary pressures. 2 because of the persistently low inflation experienced in several major countries, some observers have gone so far as to declare the phillips curve dead. here at home, though, our experience has been different. as the title of my speech says, inflation in canada has been well behaved. before looking at the evidence that supports this claim, i would like to explain why this relationship is an important part of the bank of canada ’ s approach to conducting monetary policy. as i said at the beginning of this speech, the primary objective of the bank ’ s monetary policy is to achieve low, stable and predictable inflation. like many other central banks that also practise inflation targeting, we adjust our policy interest rate to try to bring overall demand and supply into balance so that all of our productive resources are fully utilized. at this point, our labour force would be fully employed, and the economy overall would be using all of its productive capacity. 3 this is what we mean when we say the economy is operating at its potential output. 4 the concept of potential output is important because inflation should be close to our 2 percent target when the economy is operating at that level. when there is a difference between the economy ’ s potential output and what is actually being produced, we say there is an output gap. if we project that strong growth is likely to push the economy above potential — creating a positive output gap and causing inflation to increase above our target — we may raise interest rates to cool demand growth. 5 and the reverse is true if weak growth is set to pull the economy below its potential, thus creating a negative output gap. so, by adjusting our policy interest rate, we influence demand for output and employment, aiming to close the output gap and achieve our inflation target. to be sure, other factors beyond the output gap can affect inflation, measured by the consumer price index ( cpi ). exchange - rate movements can affect inflation because they directly affect the price of imported goods and services consumed by households. and, because statistics canada calculates cpi inflation using 2 there are a few different ways to define the phillips curve. in this speech, i am talking about the relationship between inflation and the economy ’ s output gap, not the relationship between inflation or

bank has been providing fully funded scholarships to five outstanding economics students at third and fourth year levels. this support is also expected to shift to postgraduate economics programmes as soon as the modalities are agreed between the two institutions. vice chancellor, we are aware that the supplementary funds provided by boz cannot meet all your requisite needs with regard to enhancing your research capacity. i therefore urge you to forge other linkages that promote research. i have in mind the african economic research consortium ( aerc ) whose principle objective is to strengthen local capacity for conducting independent, rigorous inquiry into problems pertinent to the management of economies in sub - saharan africa. aerc was established in 1988 as a public not - for - profit organization devoted to advanced policy research and training in economics. however, it is rare to find zambians utilizing the facilities which are offered by this organization. our hope is that with this information, we will see more papers by unza academicians on the aerc website in the near future. in order to encourage research on local issues by our own researchers, i am contributing an book to the unza library by professor paul collier, the director for the study of african economies at oxford university. the book, “ the bottom billion ” provides an example of the sort of issues which we expect our own authors to be able to elucidate on more clearly from their own experiences. in the book, collier analyses the causes of failure by fifty failed states, pointing to a set of traps that snare these countries. these traps include civil war, a dependence on extraction and export of natural resources, being land - locked, and bad governance. surely our experience with some of these “ traps ” should make us better experienced to explain the issues. this is what we expect of unza. vice chancellor, on our part, we will continue to assist unza as guided by the mou. we are very confident that the support that unza is receiving from partners such as boz will go a long way in furthering academic excellence and uplifting the levels of morale among faculty members. i thank you!