pressure on the manufacturing sectors of commodity exporters coming from the strength in their exchange rates, again in the absence of traditional demand from the g - 3. adjustment is inevitable – and it will be substantial. in general, such changes should not be frustrated, but rather facilitated by policies that enhance economic flexibility. second, all countries need to maintain price stability in an environment where g - 3 monetary policy cannot be expected to lead the global cycle. as i will discuss in a moment, a key mistake would be to let fears of capital inflows and exchange rate pressures dominate the imperative of domestic price stability. it is paramount that monetary policy everywhere acts to ensure that inflation expectations remain in line with medium - term policy objectives. everything else being equal, higher commodity prices usually necessitate higher policy interest rates. the degree of the policy response depends on many factors, including the reasons behind the price increases, the expected persistence of the shock, and whether a country is a net exporter. policy - makers also need to weigh the importance of commodities in the consumption basket ( chart 7 ), the historic experience with price pass - through, and how well anchored are inflation expectations. it bears consideration that the terms - of - trade shock could be even more disruptive. most of us have become heavily reliant on manufactured goods and components from china ( table 2 ). for example, in canada, partly as a consequence of chinese trade, goods price inflation has run about 1 per cent for the past decade. however, with commodity prices rising sharply in china, second - round effects on manufactured goods pricing are possible, due to rising wages and input costs and, potentially, exchange rate appreciation. finally, it has to be considered that the process of globalization, with its large - scale displacement, may actually reduce potential growth in advanced economies during the adjustment phase. 6 canada has learned through long experience that the role of the exchange rate is crucial. for commodity exporters, improvements in the terms of trade tend to put upward pressure on the exchange rate. when such movements in the nominal exchange rate are limited, wages and a range of other prices respond. this is a more disruptive form of adjustment that can have profound implications for employment, financial stability and competitiveness – the very objectives exchange rate management seeks to protect. recent experience suggests that many emerging economies are taking the real adjustment through higher domestic inflation ( chart 8 ), in part because of concerns over capital inflows. to the extent that the nominal exchange

from the university of toronto, a winner of a bank of canada fellowship award, is doing innovative work in this area. of course, we will also continue to talk directly to canadian companies to gather intelligence on the spread of ai. the future of money finally, there is the central banker ’ s favourite subject, money. technology is affecting how canadians make payments, so it will affect money too. to start with, payments canada is working with the bank and with the major financial institutions to modernize our core payments systems. this will allow for wider access and more innovation. the first stage is to replace the wholesale system, now over 20 years old, which manages transfers between major financial institutions and through which the bank of canada operates. most of the work on the new wholesale system should be completed in 2020. now, the wholesale system handles most of the dollar value of payments. but there are thousands of times more retail transactions on any given day. so, modernizing the retail payments system is a top priority. two to three years from now, you will be able to execute transactions between yourselves in real time — a major advance over today ’ s lags. these prospects have the bank thinking hard about the future of money, especially cash. a decade ago, more than half of all transactions in canada were done with cash. today, that number has dropped to about one - third. it is more and more common to see people tap a card or take out their phone to make a payment. canadians are also doing more business online, and more than half of us have sent money with paypal or interac e - transfer. certain businesses have begun to accept only electronic payments. 4 / 6 bis central bankers'speeches i believe that central bank money — the bank notes you have in your pocket — will always provide an important public good : an individual ’ s sovereign right to make payments with an instrument that is universally accepted and final. a private digital currency cannot deliver that, regardless of how widespread its use may become. the other nice thing about cash is that it will still work even during power blackouts or cyber attacks. as a consequence, bank notes will probably always be around to some degree, if only as a contingency for unusual events. all things considered, then, it is an open question whether the bank of canada would ever see the need to issue a currency in digital form as a substitute for cash. nevertheless, the world of money is evolving very rapidly, so we need to