35 The financial conditions in the large and dominant currency areas, such as the dollar and the euro, are spread to the rest of the world via the free movement of capital irrespective of floating exchange rates. Floating exchange rates cannot therefore isolate an economy from the global financial cycle. This can, of course, lead to problems for some countries during certain periods. It can, for example, lead to inflated or rapidly falling financial asset prices, posing considerable risks to the financial system and macroeconomic growth. Interest rates are currently determined to a large extent directly or indirectly by the conditions on the global financial markets. This makes it more difficult for central banks in individual countries to affect the domestic economy. Moreover, the large capital flows can have undesirable effects on the exchange rate. This reduces the room for manoeuvre for domestic economic policy in countries like Sweden – small, open economies with a large financial sector. 36 A current example of monetary policy abroad placing certain restrictions on domestic policy is that in the situation we have – where inflation has undershot the target for several years – a dramatic and sudden appreciation of the Swedish krona could be problematic. It is therefore important that the Riksbank’s policy relates to policy developments abroad, particularly in the euro area. A significantly higher interest rate in Sweden would not only risk holding back inflation under the target and entrenching it on a low level but also risk leading to much lower growth in Sweden.

The structure of this policy discussion will be based around three themes: the importance of  BIS Review 53/2003  3  transparency in order to overcome information-related problems, reactions to financial innovation and, lastly, increasing integration and potential international spillovers of crises. C.1  Responses to the lack of information  The information imperfections illustrated by recent episodes of market turmoil notably include incomplete and disparate published information by firms traded on the markets. I see key challenges in harmonising and improving the availability of information. The ultimate objective is to allow for rational investment decisions and a correct pricing of risk. Much has been done at global level and by the EU Financial Services Action Plan to increase the degree of transparency supporting the working of financial markets. This action has intensified since the high-level corporate failures in the United States, which demonstrated that there is ample scope for misleading investors through the manipulation of accounts and the information disclosed. Maybe the most eye-catching reform - and a key challenge for companies and banks in particular - is the introduction of new accounting standards. The International Accounting Standard Board and the Federal Accounting Standard Board are both constantly trying to improve and harmonise these frameworks on both sides of the Atlantic. Indeed, harmonised and high quality accounting standards could make a significant contribution to the integration and efficiency of financial markets, and these could also help in Europe where the differences in accounting rules could affect the cross-country comparability of firms’ accounting information.