That was justified theoretically by appeal to the comparative advantage of monetary over fiscal policy in controlling nominal demand or to Ricardian Equivalence or to the argument that fiscal expansions were harder to reverse than initiate. 2. Monetary policy was therefore assigned the primary role in short-term aggregate demand management, with policy conducted through the manipulation of a suitable short-run interest rate. BIS Review 111/2010  1  3. The monetary transmission mechanism operated mainly through longer-term interest rates, asset prices and expectations of future inflation. Expectations of future policy rates were central and credibility was key. These channels might be augmented by a weak credit channel but the banking sector generally was conspicuous by its absence, particularly in the New Keynesian synthesis models, which also dominated thinking within central banks. The importance accorded to expectations led naturally to an increased focus on communication and transparency. 4. The conduct of monetary policy was best delegated to an independent central bank, free of short-term political considerations. That was buttressed by academic thinking which drew attention to the potential time inconsistency of optimal policy when expectations of future policy mattered and which suggested that monetary policy was best delegated to conservative central bankers with long horizons. 5. Intermediate monetary targets were not useful, because of their unstable link with the ultimate objectives of policy (though that did not preclude them being helpful at times as indicators of future demand and inflation).

This has contributed to a well-diversified economic structure and has increased the resilience of the economy to external developments. The financial sector has also seen significant transformation. The restructuring, consolidation, and internal rationalisation of the banking sector is now virtually completed. Governance and risk management practices have also been improved while structural enhancements have been made in the capital market, significantly enhancing its role in the financial system. A comprehensive and robust Islamic financial system now also operates in parallel with the domestic, conventional financial system. Against the background of strengthened economic fundamentals and financial system, Malaysia has taken the opportunity to sequentially deregulate and liberalise the financial system. This includes the introduction of a new interest rate framework that is market-driven,  1/2  the liberalisation of foreign exchange administration rules to promote greater efficiency and enhance risk management in foreign exchange transactions, and the introduction of new foreign players into our financial system. In July this year, Malaysia adopted a managed float for the Ringgit exchange rate to better position Malaysia to respond to structural changes in the global and regional environment. Under this arrangement, the Ringgit is monitored against a basket of currencies of Malaysia's major trading partners. In this world of greater uncertainty, there has been significant focus on the issue of surveillance and risks and vulnerabilities. Experience has shown that surveillance has improved policy performance as well as the ability to take pre-emptive action to contain the impact of disruptive and destabilising developments.