david dodge : monetary policy choices : the canadian experience remarks by mr david dodge, governor of the bank of canada, to the chambre de commerce france - canada and les canadiens en europe ( france ), paris, 12 march 2002. * * * it is a great pleasure to be with you today here in this wonderful and historic city. canada and france share important links that cannot be weakened by time. there was, of course, a vibrant french presence in north america long before there was a country called canada. the french contribution to canada is not restricted to language alone. canada's legal and political institutions, as well as our culture and way of life, retain a clearly visible french influence, and will continue to do so. obviously, our economies and the economic links between our countries have come a long way over the years. the chambre de commerce france - canada was established just after the second world war. the chambre has played an important role in reinforcing commercial ties between our two countries that reflect the historical and cultural links already in place. les canadiens en europe is another organization that seeks to strengthen the many ties between us. today, france and canada are both members of the g - 7 – partners at the forefront of the global economy. the strong links between our two countries are also reflected in the close working relationship between the bank of canada and the bank of france. since becoming governor of the bank of canada last year, i have been pleased to continue this relationship. i am happy to be working once again with jean - claude trichet, the governor of the bank of france. bank of canada staff regularly attend the annual seminars hosted by the bank of france. and i hope we will continue to strengthen the working relationship between our two institutions. over the years, both canada and france have had to make decisions about the framework guiding monetary policy. the authorities in the two countries have made choices that reflect the differences in our economies. today i'd like to talk about some of these choices, and what they have meant for our countries. as well, i will give you a brief update on canada's current economic situation and outlook. inflation targeting in the early 1990s, most of the world's central banks found themselves facing a common problem. they needed to make sure that their economies did not return to the high and volatile inflation seen in previous decades. further, they were looking for a way to keep inflation expectations under control. in general, central banks did a good

job with this. certainly the bank of france was successful in the early 1990s in building credibility as an inflation - fighting central bank. at that time, the bank of canada and the government of canada had come to a shared appreciation of the damage that inflation can do. so they made an important decision in early 1991. they announced a joint agreement to adopt explicit inflation - control targets. the agreement has been very successful in giving canada low, stable, and predictable inflation. it has been renewed three times — most recently for five years until the end of 2006. today, both the bank of canada and the european central bank are working to strengthen the economies in their jurisdictions. we both want to promote stable growth and rising living standards. and, importantly, we agree that promoting low and stable inflation is the best means to those ends. there are similarities between our inflation - control systems. for example, we both focus on inflation, and we both aim for price stability over the medium term. but there are also some differences that i want to highlight for you today. the bank of canada aims for price stability through its inflation target of 2 per cent. on the other hand, the european central bank has an inflation ceiling of 2 per cent, as measured by the harmonized index of consumer prices. this may look like a subtle difference, but it is important. for the bank of canada, 2 per cent is the midpoint of our 1 to 3 per cent inflation - control target range. it is a target, not a ceiling. our focus on that midpoint makes it clear that we run monetary policy in a symmetrical way. that is to say, we pay equal attention to any significant movement away from 2 per cent — whether above or below. when demand is strong, it can push the economy against the limits of its capacity to produce. this will tend to raise future inflation above its target midpoint. in these circumstances, the bank will raise interest rates to cool off the economy, and return inflation to the target. but this process also works in the other direction. when demand is weak, as we saw in 2001, this means that future inflationary pressures are likely to ease. so the bank will lower interest rates to stimulate the economy, absorb economic slack, and return inflation to the target. by working in a symmetrical way in response to surprises in demand, our inflation - targeting system helps to smooth the peaks and valleys of the business cycle. this promotes sound, and generally less variable, economic growth