, we identified as a core priority the need to reinvent central banking, in part by refreshing and upgrading the tools we use. the cycle of modelling - forecasting - remodelling is as old as empirical economics. it is how we make progress. today, i want to review the history of models at the bank of canada, illustrating how each new generation of models has built on the successes of the previous generation and adapted to the changing needs of policy - makers. i will describe how economic theory and computer technology have enabled this evolutionary process and speculate on what we can expect in the next generation of economic models. evolution and progress a key issue in building economic models is the trade - off that exists between forecasting ability and theoretical rigour. forecasting models focus primarily on capturing empirical regularities. they work well when the economy and the shocks that it faces do not change much over time. in 1 / 7 bis central bankers'speeches contrast, theoretical models built for policy analysis are based on a specific interpretation of how the economy functions. their specifications may hold true on average, but not for every data point. so models with a strong theoretical base tend to underperform empirical models in normal times. however, they can be very useful in explaining behaviour when large shocks cause databased models to break down. the two types of models have tended to be complementary, but that has never stopped economists from pursuing the holy grail of a single model that combines strong theoretical foundations with good empirical performance. over time, advances in computing capability have made it possible to build more realistic behavioural assumptions into models, improving this trade - off. however, the history of model development at the bank of canada reflects both this quest for synthesis as well as the evolving needs of policy - makers. each new model has drawn on the strengths of its predecessors while addressing their shortcomings. and throughout this history, advances in both economic theory and computer technology have played an important enabling role. the bank began modelling in the 1960s, when staff and visiting academics built rdx — which stood for the research department experimental model. the development of the mainframe computer was essential to this work, but not every institution had one. one academic involved in those early efforts at the bank, john helliwell of the university of british columbia, tells of sending boxes of punch cards by bus to a computing centre at the universite de montreal and of inputting data by modem to a computer in utah. early models used by most

can we conclude about the future growth prospects for the region? we need to address our macroeconomic imbalances. historically, regional governments have used deficit financing to stimulate economic activity. however, the large debt burdens which many face and which have led investors to shift away from providing financing could impact this strategy. this does not mean that our economies cannot grow, but we may need to rely more on private sector flows to drive economic activity, at least in the short term. we need more investment spending to drive our productive capacities and raise the ratio of capital spending as a proportion of gdp. current budgetary constraints raise the question of how will governments allocate their resources in the future. social expenditures? capacity building infrastructure? however, while macroeconomic stability is necessary it is unlikely by itself to be sufficient to propel regional economies forward. we will need to inter alia raise productivity levels through process improvements and innovation. we need to take advantage of ict technology and, as old sectors fade, we have to encourage new sectors such as alternative energy, design services, cultural industries, animation and software development, for these are areas in which size need not be an impediment. our future can be bright but there will be some bumps along the way. our ability to recognise and act on these challenges in as expeditious a manner as possible will allow us to achieve our long term objectives.