There are also other dissimilarities between the functioning of our respective economies and between our institutional frameworks which may shed some light on the differences between our monetary policy regimes:  11  BIS Review 105/2000  •  Denmark has a long history of a fixed exchange rate which inspires credibility;  •  Denmark’s membership of ERM II provides exchange rate policy with an institutional anchor;  •  Denmark has more stable terms of trade than Norway. Moreover, there is strong and well-deserved confidence in the ability of fiscal policy to stabilise economic growth in Denmark. The most substantial changes in the Norwegian terms of trade are due to fluctuating oil prices. Variations in Denmark’s terms of trade are negligible. In this sense the Norwegian economy has more in common with countries like New Zealand and Australia, which are also large exporters of commodities. A substantial change in the terms of trade  BIS Review 105/2000  12  translates into considerable changes in these countries’ earnings and balance of payments. Over the years this has resulted in sizeable exchange rate fluctuations. The exchange rate is a buffer against changes in the terms of trade. While a country like Denmark has maintained a stable exchange rate, commodity-producing countries typically experience fluctuations in the exchange rate in tandem with changes in the terms of trade. In New Zealand, Australia and many other countries monetary policy is oriented directly towards price stability, and these countries permit short-term fluctuations in the exchange rate.

There are now more than 600 Islamic financial institutions operating in more than 75 countries. Increasingly, existing Islamic banking institutions are expanding their operations with presence in new jurisdictions. This is resulting in increased cross border financial flows. There has also been increased international participation in Islamic financial markets. Since the late 1990s the Sukuk market has emerged as an important form of intermediation in Islamic finance. It has been instrumental in the financing structures for infrastructure projects, investments in the utilities sectors, in particular for water and power projects, and in the services sector, in education, healthcare and transportation. Islamic finance essentially offers clear value propositions to both global issuers and investors. For issuers, there is access to new sources of funds and liquidity. And in introducing a new asset class, investors gain from portfolio diversification and new investment opportunities that are aligned to productive investment activities. Internationalisation of Islamic finance: mutually-reinforcing benefits Islamic finance draws its strength from serving the real economy. An important feature of Islamic finance is that it involves financial transactions that must be accompanied by an underlying economic transaction. And when it is cross border, it will facilitate financial flows that will support international trade and investment flows. It will contribute towards bridging economies and enhancing our economic connectivity with each other. In this current global environment in which emerging economies are demonstrating their resilience with the ability to sustain growth despite the moderation in global expansion, there is tremendous prospects for mutually reinforcing growth from increased economic connectivity.