mr thiessen converses on the conduct of monetary policy in canada under a floating exchange rate system speech by mr gordon thiessen, governor of the bank of canada, to the canadian society of new york, new york, on 9 march 2000. * * * the conduct of monetary policy when you live next door to a large neighbour both in canada and elsewhere, much ink has been spilled over the past year on the pros and cons of different exchange rate regimes and the implications for monetary policy. interest in the subject was piqued by the difficulties experienced in 1997 - 98 by a number of emerging - market economies in asia - difficulties that had a lot to do with unsustainable exchange rate arrangements. as well, the formation of a large single currency area in europe, just over a year ago, focused attention on monetary unions. canada ’ s floating exchange rate system has itself been the subject of debate, particularly while our economy was adjusting to the effects of falling world commodity prices. there have been a number of changes in exchange rate regimes recently. several asian countries have abandoned their fixed exchange rate arrangements for more flexible systems. last year, brazil also moved to a floating exchange rate. conversely, argentina was seriously debating giving up its currency board arrangement and adopting the us dollar. and of course this past january, ecuador embarked on the road to “ dollarization ” in an effort to restore political and economic stability there. in a world of increasingly open markets for goods and services, burgeoning international trade, and massive global capital flows, what can we say about the appropriate exchange rate arrangements and the scope for independent monetary policies in individual countries? i believe that canada is well placed to offer some useful insights, living next to a much bigger neighbour, with whom we have forged very close economic and financial links over the years. and so today, i would like to talk about the conduct of monetary policy in canada under a floating exchange rate system. i will end with a brief summary of the state of the canadian economy. economic and financial links between canada and the united states no two other countries share as much as the united states and canada - and i do not just mean hockey, baseball, or the longest undefended border in the world! let us look at some basic economic facts. the value of goods and services that cross the canada - us border every year amounts to about us $ 370 billion - 40 % of our gross domestic product. canada accounts for nearly one - fifth of

uncertainty about the production potential of our economy at this time of structural change, the bank is now monitoring a wide range of indicators for early - warning signs of pressure on capacity and prices. up to now, our inflation performance has been somewhat better than we had expected. while the increase in the total cpi over the past 12 months to january was 2. 3 %, our core rate of inflation ( excluding food, energy, and the effect of changes in indirect taxes ), at 1. 3 %, remains in the bottom half of the 1 to 3 % target range. this good inflation performance bodes well for the continued expansion of the canadian economy. but what remains to be seen is whether this expansion will bring with it strong productivity gains for canada similar to those witnessed in the united states. one thing is clear. the job of the bank of canada must be to keep inflation in canada low and stable. without that, we will be risking both the economic expansion and the potential productivity gains.