economize on the use of foreign exchange. there are lessons for the caribbean here with respect to a single regional currency and the way in which it can economize on the use of foreign exchange. factors considered in judging reserve adequacy having discussed extensively the factors considered by central banks in deciding to accumulate reserves, let us attempt to draw up general rules about reserve adequacy. the most common factor considered in judging reserve adequacy is the equivalent number of months imports. a measure based on imports, it was felt, could determine how long a country could continue to import if all other inflows of foreign exchange dried up. for many years the guideline of reserves equivalent to 12 weeks of imports was used as the accepted measure by the international monetary fund, but in recent years, particularly after the south east asian, crisis this has been questioned. the currently held view is that this measure is of limited value, since it focuses solely on the external current account, which was relevant in the years of limited capital flows to developing and emerging market countries. indeed, these countries have more open capital accounts and are receiving greater amounts of capital flows. therefore, in a world of highly mobile capital, reserve adequacy should be based on rules that focus on the vulnerabilities to the capital account. this view has been supported by feedback from outreach activities conducted by the imf and world bank in emerging market economies. reserve levels and debt debt based indicators have been developed as a means of measuring reserve adequacy. one measure, the level of reserves to short term debt by remaining maturity, is deemed to be a useful indicator. the level of debt service repayment obligations as a ratio of export of goods and services is another which attempts to link earnings to payments. the ratio of debt service to gross domestic product is probably the most heavily used. the latter does not take into account foreign exchange earnings, it is related more to the growth of the overall economy. however, high levels of growth of gdp do not guarantee foreign exchange growth. the structure of production must be geared towards export earnings in order for economic growth and foreign exchange accumulation to be in sinc. generally speaking, however, it is the foreign component of debt that is of most interest to capital market watchers and rating agencies, though international financial institutions like the imf are also concerned about the overall debt burden and its sustainability. traditionally, government debt service obligations have been the major consideration,

grant spencer : the impact of the global financial crisis on financial policy summary of remarks by mr grant spencer, deputy governor of the reserve bank of new zealand, at the symposium on financial sector governance, auckland, 20 september 2010. * * * in this presentation, i would like to discuss new zealand ’ s financial policy response to the global financial crisis. my focus here will be on permanent changes to policy following the crisis rather than the initial short term “ emergency ” responses. i will cover financial policies overseen by the reserve bank, namely monetary policy, liquidity management and the prudential supervision of banks and non - banks. monetary policy in new zealand, monetary policy focuses on the maintenance of price stability. this alone provides no guarantee of economic stability or financial stability. however, the experience in new zealand and overseas suggests that maintaining price stability over the medium term is the best and most worthwhile contribution monetary policy can make to achieving broader economic and financial stability. our inflation targeting framework served us well during the financial crisis and helped guide sensible policy responses. immediately prior to the crisis, monetary policy in new zealand had been relatively restrictive with the reserve bank increasing the official cash rate ( ocr ) between 2004 and 2007 in response to elevated inflation pressures associated with a booming housing market. as the global crisis emerged and deepened, we responded by reducing the ocr aggressively. the ocr was cut during 2008 and early 2009 from a high of 8. 25 percent to just 2. 5 percent. these reductions were appropriate, despite high headline rates of inflation at the time due to record high oil prices. the policy easing was consistent with an outlook for rapidly diminishing inflation pressures as the global and domestic economies turned sharply downwards. going forward, medium term price stability will remain the primary objective of monetary policy. however, we expect that monetary policy will have more bite over the next few years than it has had for many years ; for a number of reasons : first, following the crisis our banks now face a higher cost of funds. it is now more expensive for them to borrow offshore, which in turn has seen them compete more aggressively for funds raised in the domestic retail deposit market. we currently estimate that the spread of the banks ’ average cost of funds over the ocr is some 150 basis points higher than prior to the crisis. this state of affairs is likely to persist for some time. it means that, for any given ocr, the rates the banks charge their customers for lending will be higher than before.