rules of trade. all of us need to support these efforts and to be vocal in resisting calls for protectionism. in addition, it is critical that we get on with the job of building an international monetary order for the 21st century. a more effective international monetary fund ( imf ) has a crucial role to play in this regard. this issue is extraordinarily important, and i spoke at length on this topic in a speech i gave last month in montreal. current economic developments in canada against that backdrop, what specific policies are needed to help the canadian economy adjust to global developments? while imbalances pose risks ahead, recent economic growth in the global economy has been quite strong, led by the united states and china. this growth has increased the world prices of oil and of many other commodities that we produce in canada. as a result, there has been a marked improvement in our terms of trade — that is, the ratio of the prices that we receive for our exports to the prices we pay for our imports. this improvement has helped to raise real incomes and stimulate domestic demand in canada. we have also been importantly affected by the sharp appreciation of the canadian dollar against the u. s. dollar over the past couple of years — an appreciation that has had a major impact in many sectors. the canadian economy has been adjusting to these economic forces. we have seen increased business investment spending in sectors that are benefiting from higher world prices. we are also seeing rising investment in sectors that are not very exposed to international trade, as such firms react to strong growth in domestic demand. and we've had very strong investment in housing. but in other sectors that are highly exposed to international trade, mainly goods - producing sectors, prices are either falling or rising very slowly. firms in these industries are feeling the pressure of the higher canadian dollar, and they are also facing increased competition from other regions of the world. the good news is that many canadian firms are making the necessary adjustments. investment spending is being directed towards increased specialization, higher productivity, and lower costs. since much of the productivity - enhancing machinery and equipment is priced in u. s. dollars, the stronger canadian dollar has made it easier for firms to make investments. a growing number of firms are looking to cut costs by importing more inputs, particularly from asia. other firms are phasing out production lines with low profit margins. through its monetary policy, the bank of canada is helping these adjustments by keeping inflation low, stable,

just as much about inflation falling below target as we do about inflation rising above it. this symmetric approach helps keep the canadian economy near its production potential, thus encouraging strong, sustained growth in output and employment. i'm not arguing that all countries should copy every detail of our inflation - targeting regime. but it is important that central banks follow policies that anchor inflation expectations and thus prevent a buildup of deflationary as well inflationary pressures. as i mentioned before, both canada and the united kingdom operate with a flexible exchange rate. much has been said recently about floating exchange rates in relation to certain asian economies — china in particular — and global imbalances. the policies of some asian economies to encourage export - led growth, including the fixing of their exchange rates to the u. s. dollar, have caused a buildup of large foreign exchange reserves, thus exacerbating global imbalances. it's important to point out that, in theory, there is nothing wrong with countries having fixed exchange rates. but in practice, there is a major problem. through " sterilization, " certain asian countries — including china — have been trying to offset the domestic price effects of their foreign exchange intervention. this is inhibiting economic adjustment. at the bank of canada, we have argued that it is very much in china's own economic interest to float its currency. by having a flexible currency, china could gear its own monetary policy to its own domestic considerations. if the external value of the renminbi were allowed to rise, the global purchasing power of chinese citizens would also rise. this, in turn, would help to spread the gains from integrating into the world trading order throughout chinese society and would allow that country to boost its consumption, thus helping to resolve global imbalances. floating exchange rates are not the whole answer to the problem of global imbalances, but they are an important part of the solution. as i just said, when countries offset the effects of intervention, they delay domestic economic adjustment. they also delay global adjustment. just as worrying, such intervention is provoking threats in certain political quarters of protectionist measures. such wrong - headed measures could choke off the growth of international trade that has led to rising incomes worldwide. and so it is very important that all countries work to protect and enhance the free flow of goods and services by pushing the doha round of trade talks to a successful conclusion, and by strengthening the world trade organization to ensure proper compliance with the