It is sufficiently larger than the negative investment demand effect from higher interest rates, such that internal balance is attained and monetary policy is able to pursue domestic inflation and growth objectives.4  1  Linda Goldberg, Paolo Pesenti, Joseph Tracy and Matthew Higgins contributed to these remarks. 2  A global financial cycle refers to the global co-movement of credit by banks and capital markets, asset prices, term premia, and risk premia. 3  Fleming (1962) and Mundell (1963). 4  Krugman (1999). The balance sheet effects imparted from a large international debtor position may work against achievement of an improved external balance and attainment of internal balance. BIS central bankers’ speeches  1  Different policy options are available to a country with a high degree of capital mobility and a preference for currency stability. A country may prefer currency stability as an effective nominal anchor, or because of concerns about the broader uncertainties associated with currency volatility. Regardless of the reason and because the exchange rate is not available to absorb external shocks, this country will be in an unfavorable position to achieve domestic macroeconomic objectives by using monetary policy. Instead, monetary policy is aimed at external adjustment. Tighter foreign monetary policy and financial conditions need to be validated by tighter domestic monetary policy to maintain currency stability. With domestic monetary conditions effectively imported from abroad, they may sometimes conflict with domestic growth and inflation objectives. Simply put, currency stability is prioritized. These policy considerations are summarized in the well-known international policy trilemma.

How Malaysia survived the global financial crisis Let me conclude by outlining why we had not been adversely affected by the recent financial crisis. Banking system maintained strong financial and capital buffers at end 2008 during the peak of the crisis as evidenced by:   Strong capital position with RWCR of 12.6% and core capital ratio of 10.6%.   Ample liquidity with total interbank placements of more than RM150 billion with BNM that can be unwound to release RM liquidity to the system at any time.   Low exposures to foreign currency (FX) denominated assets.   Banks’ leverage position remains manageable and lower than foreign institutions abroad. –  Balance sheet leverage (i.e. total assets / common equity) for the Malaysian banking system of about 15 times (vs. global average of about 20 to 30 times). Banks had strengthened institutional set-up and capacity post Asian Financial Crisis through:   More robust risk management standards and practices.   Stronger corporate governance structure.   Smooth implementation of the Standardised Approach of Basel II’s Capital Adequacy Framework.   Balanced and diversified business portfolios. Enhanced financial infrastructure post Asian Financial Crisis through:   Enhanced depth and size of bond and Sukuk market (about 107 % of GDP).   Strengthened financial safety nets (e.g. establishment of Malaysian Deposit Insurance Scheme)/Danajamin/CDRC/SDRS.   Strengthened regulatory and supervisory approach (e.g. gradual move towards principles based regulations, adopting of risk based supervision).   Legislative reforms (e.g.