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The global economy has continued to grow at a robust pace since the July Monetary Policy Report Update.

The Canadian economy continues to adjust to major global developments.

At the Bank of Canada, we have worked hard over the past several years to define our goals and our methods for achieving them. We have continued to strengthen our monetary policy framework, and we have established priorities in all areas of our operations to help us meet our strategic objectives. In 2002, the Bank set out a medium-term plan for the period 2003–05. The plan’s clearly defined policy frameworks and priorities were critical in guiding our analysis and our decisions in 2003, a year in which Canadians across the country were affected by a number of severe and unanticipated events.

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

The global economy has been unfolding largely as expected, and prospects for continued robust growth are quite favourable, especially over the near term.

The Canadian economy continues to operate just above its full production capacity, and the near-term outlook for core inflation has moved slightly higher.

The Canadian economy continues to grow at a solid pace, consistent with the Bank’s outlook in the January Monetary Policy Report Update.

We propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We study the implications of financial integration on monetary policy transmission. Among various aspects of financial integration, the bond duration plays a major role. These results hold for conventional and unconventional monetary policies.

Six months ago, at the time of the last Monetary Policy Report, the global economic and financial environment was volatile and highly uncertain because of the adverse situation in Asia and the fallout from the Russian debt moratorium.

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