bank ’ s inflation - control target range. together, these improvements in our basic economic circumstances have facilitated the major decline that we have seen in domestic interest rates over the past year or so. many interest rates in canada are now at their lowest levels since the 1960s. and for maturities of up to 10 years, they are also below comparable u. s. rates by the widest margins we have seen in many years. some of the gloom about the economy during the past year had to do with the perception that the stimulus to economic activity from the decline in interest rates was taking a long time to have its effects on spending and employment. there are, of course, lags in the impact of monetary policy actions on the economy that are widely believed to be of the order of 12 to 18 months. however, what may not have been widely appreciated was that the reductions in short - term rates that began in the spring of 1995 initially just reversed the runup in rates that occurred after the mexican currency crisis and before the 1995 federal budget. the real easing in monetary conditions relative to 1994 effectively started only in late 1995, following the quebec referendum, and continued for one year to late 1996. therefore, it is not surprising that signs of the response to that easing have only been apparent quite recently. because of the lags involved, the contribution of the easier monetary conditions to a stronger expansion in output and employment should continue for some time. thus, we expect the economy to expand at rates in excess of the growth in potential output through 1997 and 1998. in other words, we anticipate that the margin of unused capacity in our economy will shrink substantially over the next couple of years. as i noted, there are those who view this outlook with scepticism. for them, it is not a question of lags. they argue that the current very low interest rates will not do enough to encourage additional household spending, given high debt levels, a low savings rate, and high unemployment. i will not tell you that these factors cannot temper the response to low interest rates. of course they can. but i do not believe they are sufficiently important to offset it. let me take the arguments in turn. first, household debt levels. yes, they are high relative to personal disposable income - - over 90 per cent. but the burden of servicing this debt represents only 8 per cent of disposable income - - well down from the peak in 1990 - - and is expected

, and understanding the impact a disorderly exit would have on other positions held by the firm. the uncertainty about how markets respond in conditions of acute stress - uncertainty in terms of how correlations behave, how much liquidity will be available, the risk profile of counterparties, etc., combined with the inherent uncertainty about the probability of a seemingly remote event, and the scale of losses associated with such an event, all argue for a more prudent cushion against risk than would be necessary in a less complex and more certain state of the world. third, our approach to financial stability relies a lot on market discipline and, as a result, depends significantly on the quality of accounting and public disclosure. we see some progress in the extent to which firms provide a clear picture of their underlying risk profiles, but there is room for improvement. accounting standards have notably struggled with the challenges of incorporating innovations in financial instruments, especially when those instruments are used to offset the risks inherent in more traditional activities whose fluctuations in value have not typically been recorded in earnings or in balance sheet valuations. it is hard to see how we can be comfortable that we have achieved a reasonable resting place on these issues. in the long run, it is critical for the cause of market discipline that accounting and disclosure of financial instruments be consistent with the ongoing direction of innovation in risk management. and finally, the broad changes in market structure place a much higher premium on cooperation among supervisors, market regulators, and central banks, both nationally and internationally. unlike other countries who have moved to integrate supervisory responsibility for banks, investment banks, and insurance companies, the u. s. has preserved a model with multiple bank supervisory agencies and separate functional regulation of entities that are banks, securities firms, and insurance companies. and unlike those that have separated supervisory authority from the monetary policy and lender of last resort functions, the u. s. has kept them integrated within the central bank. across the major economies, therefore, we face somewhat different cooperation challenges within our markets. we believe the u. s. model has worked quite well, and these differences in the design of the overall supervisory framework and its relationship to the central bank are likely to persist. but we share an important interest in working together across borders to help ensure that we have a framework for cooperation that matches the increased integration of national financial markets. this is important for the supervision of international banks as well as for other global financial institutions. it is important for the payment and settlement infrastructure. and it