popular among central banks, and canada was an early adopter. under our current agreement, we aim to keep inflation around a target of 2 per cent, and we usually try to accomplish this over six to eight quarters. even in the absence of financial stability threats, the practice of monetary policy requires the central banker to deal with vast amounts of uncertainty. think of the most important aspects of a macroeconomic model – the level and growth rate of potential output, the real neutral interest rate, and the transmission of terms - of - trade shocks. none of these can be observed ; they all must be estimated. the assumptions that we make in running our models inject uncertainty throughout the policy - making process. and, since the crisis, we have also been confronted with the risk that our models have been distorted because of fundamental shifts in economic behaviour. now, on top of all this uncertainty, we have to add the uncertainty represented by risks to financial stability, a concept that is difficult to quantify. adding this whole other dimension of uncertainty complicates the practice of monetary policy by forcing us to weigh both sets of risks, the probabilities that they will be realized and the potential consequences of a policy error. so how do we manage the risks? at the bank of canada, we try to be realistic about the things we don ’ t know and do a thorough examination of the related risks. every time we come to a decision, there are a number of potential paths for policy that could be consistent with the inflation goal. in the process of formulating policy, we weigh these possibilities and focus on those that fall into a zone where the range of likely outcomes makes us reasonably certain that we ’ ll achieve the inflation target over an acceptable time frame and that financial stability risks will evolve in a constructive way. still, we know there can be times when setting policy to achieve the inflation target within the usual time frame can increase the level of financial stability risk to an unacceptable level. this would take us out of the zone where the risks are essentially balanced. because the flexibility in our framework allows it, we reserve the right to choose our policy tactics so that our actions don ’ t significantly worsen financial stability concerns by opting for a policy path that aims to return inflation to target over a longer time frame than normal. bis central bankers ’ speeches risk management, then, does not mean that the central bank will adjust policy to try to lean against every emerging financial imbalance. since we are an inflation

of demand towards the desired mix of investment and consumption. softer tradeoffs than implied by the trilemma are suggested by some of the empirical evidence on interest rate co - movements. for example, there is ample evidence that domestic short - term interest rates become progressively less correlated with short - term interest rates in large foreign countries, and that monetary policy is more autonomous, as countries move from high capital mobility to low capital mobility, and from rigid currencies to flexible currencies. 5 using foreign exchange reserves to support currency stability is unlikely to be as effective in enabling the country to attain domestic growth and inflation objectives. if losses of foreign reserves are not sterilized, the effect will be similar to that of domestic monetary tightening, and as already discussed, might work against domestic growth and inflation objectives. if reserve losses are sterilized and the underlying cause of capital outflows is not addressed, reserves losses can be persistent. macroprudential policy provides an additional tool that can add degrees of freedom and help soften the tradeoffs of the trilemma. macroprudential policy can potentially temper spillovers by modulating the type of buildup of financial imbalances that contributed to the asian crisis of 1997, countless other emerging market crisis, the global financial crisis of 2008 and the subsequent euro area crisis of 2011. progress continues to be made in designing macroprudential policy frameworks, in definition of objectives, and in developing appropriate instruments, calibration and communication. capital flow management can be viewed as the part of the macroprudential toolkit that operates across borders. over the last five years, capital flow management has received increased attention, first in managing inflows and, more recently, in managing outflows. 6 a consensus has emerged that capital flow management can be useful as part of a broader set of policy tools. in fact, the effectiveness of capital flow management may be limited if not appropriately supported by monetary, fiscal, exchange rate and prudential policies, or the obstfeld, shambaugh and taylor ( 2005 ), goldberg ( 2013 ), klein and shambaugh ( 2015 ) and obstfeld ( 2015 ). g20 ( 2010 ), imf ( 2012 ), farhi and werning ( 2014 ) and imf ( 2015 ). bis central bankers ’ speeches warranted macroeconomic adjustment. also, capital flow management practices that are transparent, temporary, and targeted seem to work best. spillovers