because of that lag, in setting policy, one wants to emphasize those changes in prices that affect the underlying trend of inflation and downplay temporary fluctuations in very volatile components of the consumer price index. that is why, unlike some other central banks, we have explicitly chosen to focus on the underlying trend of inflation and use a core rate as our operating guide. the core rate excludes the eight most volatile components of the consumer price index as well as the effects of changes in indirect taxes. but i should add that the central bank can downplay those temporary price changes only if there is good reason to believe that they will not feed into other prices in the economy and affect inflation expectations. the reason we have been able to do that is because the inflation targets have helped to establish monetary credibility and to anchor inflation expectations. inflation targeting and a flexible exchange rate my review of canada ’ s current monetary policy framework would not be complete without reference to its other key element - our flexible exchange rate. monetary policy can pursue only one objective - keeping inflation low as a means to promote the economic well - being of canadians. in pursuing that goal, we have chosen an inflation target as our anchor. and that means that we have to have a floating exchange rate. but i want to emphasize that canada is a small and very open economy, with a structure of production and trade that differs significantly from that of the united states. a floating exchange rate is important because it facilitates the adjustment to economic disturbances, such as fluctuations in the world demand for, and prices of, our products. it also facilitates adjustment to changes in savings and investment flows. over the last few years, more countries around the world have moved to flexible exchange rate systems and have adopted inflation targets as their monetary policy anchor. today, i have given you a flavour of the canadian experience in this area, and i have talked about some of the lessons we have learned over the past decade. i hope that this has provided you with some useful insights. let me now turn to recent economic developments and the outlook for the canadian economy. recent economic developments and prospects in canada the immediate impact and the fallout from last september ’ s tragic events here in new york, and elsewhere in the united states, led to a sharp increase in economic uncertainty around the world, exacerbating the effects of the global economic slowdown that had become more evident by last summer. in those circumstances, the bank of canada moved quickly and aggressively to lower interest rates. the aim was to

radovan jelasic : future of the capital market in the balkans speech by mr radovan jelasic, governor of the national bank of serbia, to participants of the economist media group conference “ future of the capital market in the balkans ”, belgrade, 24 june 2008. * * * ladies and gentlemen eight years into the transition of the serbian economy, we may safely say that our financial sector has become and, judging from how things stand now, shall remain bankcentric. such observation is based on the following two facts : 1. the share of the banking sector in total assets of the financial sector ( banks, insurance companies, leasing providers and voluntary pension funds ) remained more or less constant at around 90 % throughout the period from 2003 to 2007! 2. legislative activities on faster development of the capital market have been stuck in the doldrums for almost two years now! to illustrate, securities act, law on compulsory motor vehicle insurance, law on the market of securities and other financial instruments, law on personal income tax and law on corporate profit tax are all either in the final phases of completion or were completed and sent off to the assembly of the republic of serbia for adoption only to be placed on the long waiting list of issues to be discussed! there is no denying that voluntary pension funds and insurance companies are still hoping for a chance to invest in high - quality listed securities. they, however, remain in very short supply. let us remember that there are only four listed securities in serbia at the moment : besides bonds issued against frozen foreign currency savings deposits, we only have tigar, energoprojekt and soya protein securities. what is happening with the remaining 1800 shares quoted on the stock market? why aren ’ t they listed? could it be that somebody has turned them down – which i doubt, does not want to list them – which is also highly unlikely as they represent a good investment, or is unable to list them – which is most likely! one thing is for sure, it does not only take a law to create a capital market. and serbia is a very good illustration of the fact. enactment of adequate legislation is a necessary, but not a sufficient prerequisite for setting up the capital market. one of the key links in the chain of development of the capital market should be the pension system reform. last week we were visited by mr. klaus schmidt hebbel from the central bank of chile. he will be working as chief economist