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Canada’s inflation-control targets establish a specific medium-term objective for monetary policy.

This equilibrium model explains the trend in long-term yields and business-cycle movements in short-term yields and yield spreads. The less-frequent inverted yield curves (and less-frequent recessions) after the 1990s are due to recent secular stagnation and procyclical inflation expectations.

In the year just ended, the global economy faced a number of exceptional challenges, reflecting a wide range of economic, financial, and geopolitical risks and uncertainties. These included the fallout from the September 2001 terrorist attacks, corporate accounting scandals, stock market volatility, and developments in the Middle East. Despite this global backdrop, the Canadian economy outperformed virtually all other industrial economies, growing by about 3 1/4 per cent and creating 560,000 jobs, while inflation expectations remained well anchored to the Bank of Canada’s 2 per cent inflation-control target.

The Canadian economy regained strong momentum in 1999 as the U.S. economy remained vigorous, the global economy recovered, and commodity prices moved upwards.

Since the May Report, the international economic environment has continued to improve. Economic activity abroad grew faster than expected, while inflation in the major economies remained subdued.

In the last half-year, the economic expansion in Canada has become well established, supported by low inflation, highly stimulative monetary conditions, and a strong U.S. economy.

The year that just passed posed many challenges for all Canadians. The slowdown in the global economy became more pronounced as the year went on, and this affected households, businesses, and governments alike. The tragedy of 11 September compounded the economic difficulties and issues facing us all. Through this period of rapidly changing circumstances, the Bank met its responsibilities by responding quickly and vigorously to events in order to underpin confidence and support the economy.

Since the last Report, the Canadian economy has advanced broadly in line with expectations.

The Canadian economy continued to expand robustly in 2000 while inflation remained low.

This is the second in a series of semi-annual reports designed to increase the transparency and understanding of Canadian monetary policy.