the time i arrived at the bank of canada in 1981, there was growing disenchantment with monetary targeting, as the link with inflation was proving to be unreliable. for practical reasons, the target had to be abandoned. but as former governor gerald bouey famously put it in 1983 : “ we did not abandon m1, m1 abandoned us. ” the search for a better monetary policy framework continued through the rest of the 1980s, both in central banks and in academia. the questions were very fundamental : what is the optimal monetary policy? what is the best anchor for that policy? and should central bankers be bound by rules for policy, or should they be afforded some discretion? if so, how much? as you all know, a consensus emerged that central banks should pursue inflation targets directly, rather than targeting an intermediate variable such as the money supply. in 1991, the bank of canada became the second central bank ( after new zealand ) to adopt inflation targeting. and over the next 10 years, many other major central banks joined the inflationtargeting club. at the time, it was hard to argue with the results. inflation targeting was seen as a key contributor to the “ great moderation ” – a period of about 15 years of steady economic growth and low and stable inflation in most advanced economies. in canada, and elsewhere, consumers and businesses could make longer - term financial plans with more confidence. interest rates were lower, and economic cycles were more moderate. unemployment was lower and less variable than in the past. this success contributed to the widespread belief that maintaining low and stable inflation was the best, indeed the only, contribution that a central bank could make to the economy ’ s performance. countries with dual central bank mandates – low inflation and strong growth or low unemployment – could rely on the “ divine coincidence ” that stable inflation would emerge only when the economy was operating at full capacity. and what about the issue of financial stability? central banks would remain available as lenders of last resort, the purpose for which they were originally created, but financial stability issues were seen primarily as the responsibility of regulators and, perhaps, a problem for emerging - market economies with banking systems that weren ’ t fully developed. this policy consensus began to wobble as financial stability concerns grew during the mid2000s, and by 2007 it had fallen apart. confidence that keeping inflation low and stable would keep us out of trouble had bred complacency, and complacency bred calamity. we all

stephen s poloz : lessons new and old – reinventing central banking inaugural address by mr stephen s poloz, governor of the bank of canada, for the western university president ’ s lecture, london, ontario, 24 february 2015. * * * introduction i am delighted to be back at western, and honoured to be asked by president chakma to give the inaugural address in the president ’ s lecture series. while preparing for today, i did a little reminiscing, and i was struck by how prophetic some of the lessons i learned here back in the late 1970s have turned out to be. many of us came to western at that time to learn from the high - profile duo of david laidler and michael parkin. i can remember david laidler telling me, “ steve, monetary targets will help keep us out of trouble, but if we do get into trouble, they might not get us out. ” and then there was michael parkin, who later was my thesis adviser, who said, “ steve, there are lots of monetary policy rules that deliver the same inflation outcome, but each will have very different consequences for the economy. ” well, those words ring very true 35 years later, particularly given our experience over the past decade. while central banks were diligently maintaining low and stable inflation, we witnessed the emergence of massive imbalances, an unprecedented expansion in leverage, a global financial crisis and a synchronized downturn in the world economy. today, as we try to apply the lessons learned, we find ourselves weighing a wide range of consequences in charting the future course of monetary policy. thanks to some deft policy - making, the global economy avoided, barely, a second great depression. that said, the great recession has been very painful. indeed, more than six years after the crisis, emergency monetary policies remain in place in many economies. in short, we are still a long way from home and the headwinds are strong. the experience of the past decade makes a pretty strong case that central banking needs to be reinvented. keeping inflation on track certainly was not sufficient to keep us out of trouble. some would even argue that the tranquility fostered by successful inflation targeting helped to spawn the crisis by leading investors and financial intermediaries to take excessive risks. at the very least, it seems to me that we need to take account of a wider range of economic and financial consequences while targeting low inflation. an evolution of central banking