, 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. bis central bankers ’ speeches 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. 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 - targeting central bank

these activities make financial markets more complete and, so, enhance their efficiency. the size and sophistication of pension plans also lead them to be actively interested in good corporate governance, thus contributing to market discipline, which supports overall market efficiency. the decline in defined - benefit pensions in recent years, defined - benefit pension plans have been in decline. the number of canadians covered by defined - benefit plans has fallen by roughly 5 per cent since 1992. while the large majority of employer - sponsored plans are still of the defined - benefit variety, defined - contribution plans have grown significantly. we have seen many employers either collapse their defined - benefit plans or restrict new entrants into the plans. we have also seen increasing deficits in many defined - benefit pension plans. the ability of individuals with rrsps to use a registered retirement income fund rather than a life annuity does allow more sophisticated retirees to mitigate this risk somewhat. i am not aware of any canadian research on this topic. but it is a reasonable assumption that these results would apply to canada. but many defined - benefit plans lack portability, which lessens their attractiveness. arbitrage refers to a trading strategy that tries to take advantage of differences in prices for the same asset trading on different exchanges. 3 / 5 while part of the decline in defined - benefit plans comes from developments in the economy and the labour force, part is also due to the incentives under which these plans operate. let me elaborate. defined - benefit plans should operate so that the expected value of all benefits to be paid out equals the expected value of all contributions plus the expected returns on investments. but when the actual value of one of these variables differs from the expected value, the sponsor of the plan takes on responsibility for making up any difference. what would make a sponsor accept this responsibility? one reason would be if sponsors could mitigate the risk of worse - than - expected outcomes by being allowed to benefit from better - thanexpected outcomes. but while there is no question that the sponsor is responsible for any deficit in the plan, it is not at all clear that the sponsor benefits from any surplus that may be generated. the question of who " owns " a surplus in a defined - benefit plan has been before many different courts at different levels and in different jurisdictions in recent years. while the precise answer depends on the specific wording of the rules of any given pension plan, in general, provincial and federal pension law has evolved so that employees