The exchange rate management framework focuses on mitigating short-term excessive exchange rate volatility and ensuring alignments with economic fundamentals in the medium to long term. Exchange rate flexibility constitutes the primary buffer to cushion the effects of capital flow volatility. In the case that resulting movements in exchange rates are deemed excessive and unjustified by fundamentals, foreign exchange interventions can be undertaken. More controversial, but now increasingly accepted internationally as one of the policy options, are capital flow management measures (CFMs), aimed at directly curbing international financial flows via regulations and taxes. While there are clear economic rationales for CFMs, given the abundance of market inefficiencies and externalities, many countries tend to regard these measures only as a last resort. As such, reputation costs, asymmetric effects in managing outflows versus inflows, lack of long-term effectiveness, and limited room for calibration are but a few considerations that policy makers need to take into account. 2  BIS central bankers’ speeches  Regarding foreign exchange rate interventions, we are always mindful of its costs and limited effectiveness. In particular, interventions against market views would employ large financial resources while yielding limited success, usually only to delay the pace of exchange rate movements. Active interventions under the inflation targeting framework regime may also have unintended consequences on policy framework credibility, as the central bank’s commitment to safeguard the overall macroeconomic stability may be called into question by the public. For this, consistent communications about monetary policy framework and stance would help increase central bank’s transparency and public understandings.

The implementation of Basel II will pose a challenge to the entire  BIS Review 42/2006  1  financial community, while for the newly emerging economies this process will be a serious test since their banking systems are very much open. The discussion of the common supervisory framework also brings forward the question as to what extent the high rates of growth of credit for the private sector, globally, and in many of the dynamically developing countries, in particular, poses a risk to financial stability and how much supervisory policy could be used as a tool for solving this problem. The process of financial sector globalisation, which I already mentioned, raised for many countries the issue of choosing between either following a national monetary policy or joining a monetary union and carrying monetary policy to a supranational level. The experience of a successful realisation of the Economic and Monetary Union in Europe, as well as the experience of the countries from the area of the Frank are a good practical example for all of us about the potential advantages and challenges associated with a country's participation in a monetary union. Taking monetary policy to a supranational level is inevitably related to providing greater independence for the national central banks and delegating certain powers at a supranational level. In the democratic world, the independence of conducting policy on the part of central banks is inseparably linked to the higher degree of their transparency and reporting.