to think that this adjustment will prove manageable and not be very disruptive. first, many emes appear to be better equipped today to handle the fed ’ s prospective exit from its exceptional policy accommodation than they were during past tightening cycles. this reflects the fundamental reforms that emes have put in place over the past 15 years, as well as the hard lessons learned from past periods of market stress. among the positives are : • the absence of pegged exchange rate regimes that often came undone violently during periods of acute stress ; • improved debt service ratios and generally moderate external debt levels ; • larger foreign exchange reserve cushions ; • clearer and more coherent monetary policy frameworks, supporting what are now generally low to moderate inflation rates ; • generally improved fiscal discipline ; and bis central bankers ’ speeches • better capitalized banking systems, supported by strengthened regulatory and supervisory frameworks. to be sure, progress has not been uniform across emes, and more work remains in some countries to further strengthen institutional structures. vulnerabilities remain in several important emes, and some have been hit by a sharp adverse turn in their terms of trade due to the recent fall in global commodity prices. still, the fundamental improvements i ’ ve cited leave many emes better positioned than in the past to weather those times in the cycle when the external environment turns more challenging. second, during previous fed tightening cycles eme economic performance has generally been good. during the last three u. s. tightening cycles, eme industrial production growth has been between 7½ and 10 percent over the 12 - months from the start of fed tightening, while eme export volumes have risen 10 to 15 percent. the likely explanation for this favorable record is that fed tightening generally occurs during periods of strong u. s. economic performance. recent research from the imf bears out this hypothesis, finding that higher u. s. interest rates associated with stronger u. s. growth represent a net positive for emes. 1 financial performance of emes has been more diverse across fed policy cycles. the strongest contrast is between the tightening cycle that began in 2004, and the one beginning a decade earlier, in 1994. eme asset prices strengthened considerably during the 2004 cycle, but weakened considerably during the earlier cycle. notably, the 1994 cycle was associated with a large increase in u. s. long - term bond yields, and appears to represent a case in which there was a considerable gap between what the fed did in terms of monetary policy tightening relative to

canada might be better addressed if the bank of canada had a facility that would provide liquidity at terms longer than overnight. we are also examining changes necessary to allow the bank to accept a wider range of securities for our buyback operations. the bank's other role, of course, is to conduct monetary policy with the aim of delivering low, stable, and predictable inflation. we have been working to ensure that the financial system has the proper amount of liquidity so that the overnight interest rate – our key policy rate – remains close to target. but what we have seen since this summer is a widening of the spread between short - term market interest rates, such as the rate for commercial paper, and our target for the overnight rate. this is important, because these short - term market rates are a crucial link in the way monetary policy is transmitted : from our key policy rate, to the cost of credit, to spending, production, employment and, ultimately, to the rate of inflation. these wider spreads have persisted, and they represent a tightening of credit conditions in canada. these tighter credit conditions have come as financial market difficulties have intensified over the past few weeks and as bank funding costs have increased globally. at the same time, there is an increased risk attached to the prospects for demand for canadian exports because the outlook for the u. s. economy – particularly the u. s. housing sector – has weakened. uncertainty related to all of these factors has led to exceptional volatility in financial and currency markets globally. while there remain upside risks to inflation in canada, all factors considered, the bank judges that there has been a shift to the downside in the balance of risks around our october projection for inflation. in light of this shift, we lowered the target for the overnight rate last week. before our next interest rate decision in january, we will assess all economic and financial developments and the balance of risks, and do a full projection for the economy and inflation. conclusion ladies and gentlemen, as you know i will be stepping down as governor of the bank at the end of january, and concluding more than thirty - five years of involvement in economic policy within the public service. since this is my last public speech as governor, i thought it might be apt to conclude my remarks today with three of the most important lessons for economic policy that i – and i believe many canadians – have learned over the past thirty - five years. the first lesson is that both individuals and firms must always be prepared to