Furthermore, no exchange rate regime can offer full insulation from cross-market spillovers, particularly where the free movement of capital is allowed. Nevertheless, certain policy combinations can make things far more dangerous. Fixed, but adjustable, regimes look to be particularly fraught with perils when combined with shortcomings elsewhere, not the least of which are the severe after-effects that always seem to follow their forced abandonment. As you are aware, much of the emerging world has moved toward floating rates in recent years. For Thailand and the other countries that have made the change in East Asia, it would appear that the new monetary/exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. Inflation is in the very low single-digit range in most of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short-term interest rates that have declined to historically low levels. 4  BIS Review 10/2001  Moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. But if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. In this regard, I would note that some countries, including Thailand, have looked to inflation targeting as a framework to accomplish that end.

In my view, Asia stands at an important policy crossroads, involving a choice between pushing forward market-based reforms that are the only way toward long-term financial stability, or pursuing actions that provide short-term relief at the risk of threatening the hard-won gains of the last three years. The recognition that we have entered a new international financial environment has set in motion a range of efforts dedicated to strengthening the new international financial architecture. My remarks today will focus on what I believe can be done, from my perspective, to enhance domestic financial resiliency, within the context of these international efforts, and particularly on two essential building blocks: a strong financial system and a sound and stable macroeconomic environment. My comments reference the experience of East Asia, but reflect lessons that are more broadly applicable. Overview of recent recovery Given the depth of the problem a little more than three years ago, the Asian recovery on the whole has been remarkable, and has largely defied initial expectations that the crisis would cast a long shadow over regional growth prospects. The regional recovery has exhibited a solid "V" shaped trajectory supported by strong performance in the external accounts, and a pickup in domestic demand. Banking sectors – faced with unprecedented crisis three years ago – have been shored up through substantial capital injections and problem asset carve-outs. Corporate sector conditions also appear to have improved notably with the advent of recovery and debt restructuring efforts.