march 1983 federal election, markets were anxious about the prospect of a change of government. in the week prior to the election, capital outflow amounted to about 3 per cent of the total money stock, or about 1½ per cent of australia ’ s annual gdp. this occurred in spite of capital controls that were still in place, because the distinction between current and capital transactions was blurring and market participants were becoming more adept at circumventing the controls. exporters were by then skilled at delaying receipts when a devaluation was anticipated, while importers accelerated their payments, as did those servicing foreign currency debt. these swings caused operational difficulties in maintaining suitable conditions in the money market. as for achieving the target for m3 growth, i can well recall, as one involved in forecasting growth of the ‘ money supply ’ in those days, the impossibility of forecasting the size and the persistence of the capital flows, which were one of the major drivers of the growth in the community ’ s monetary assets. the newly elected labor government responded to the crisis by devaluing the australian dollar by 10 per cent against the twi. this was successful in reversing the flow of funds and generating capital inflow, as exporters, for example, brought onshore their pent - up receipts. but the problems were far from solved. later in 1983, australia ’ s external position was improving, due to a post - drought recovery in the rural sector, rising commodity prices and higher demand for mineral exports. the volume of capital inflow gradually mounted, further encouraged by australia ’ s positive interest differential with the major countries. this again caused problems for monetary policy as the reserve bank had difficulty withdrawing the resulting increase in cash in the banking system. the plan that was devised to counter these problems was one of a gradual appreciation of the exchange rate ( achieved through adjustment of the daily fix ), lower short - term interest rates but increased sales of government securities to fund the fiscal deficit, which was likely to see longer - term yields increase. that is, it was thought that currency speculators would be deterred by the very low short - term rates, notwithstanding the higher yields on offer at the longer end. this would help achieve the m3 target by reducing the liquidity resulting from capital inflow. the exchange rate management committee also sought to add a random element to the daily movements in the exchange rate, around the general trend appreciation, to reduce the predictability in the movements in the

the anchor currency of an asian exchange rate system. the obvious potential candidate in the long run is china, but china does not presently maintain a convertible currency and does not have a forty - year record of economic and monetary stability the way germany did by the end of the 1980s. 4 and, as noted above, china has its own adjustments to make for some time ahead, in which others in the region might not want to share. hence it seems unlikely, to me, that an asia - wide exchange rate policy is likely any time soon. most likely exchange rate policies will continue to be made with reference to the us dollar for a while yet. to the extent there is'co - ordination'it will be accidental, as a result of similar activities by various countries directed towards managing exchange rates against the us dollar – with an eye, of course, on what their neighbours are doing. it would follow from this that the likelihood of a system of closer co - ordination in which domestic policies are allowed systematically to be affected by regional exchange rate concerns is pretty small. it further follows that the prospect for monetary union is quite remote indeed. apart from the likelihood that some countries'real exchange rates will need to move a lot over the next twenty years to an extent that could be painful under a system of irrevocably fixed nominal rates, monetary union is a political as well as an economic decision. indeed, for europe, it was overwhelmingly a political decision ( which is not to say it was wrong ). you would all be able to judge better than i but my guess is that asia's political leaders are nothing like ready to make such a decision involving ceding sovereignty to a supra - national institution. that is not to say that there is not a lot of worthwhile co - operative work to be done. on the contrary, i think that there is much value to be gained by pursuing type 3 co - operation : working on making the financial infrastructure reasonably consistent, well understood and easy to use for investors across the region. the reason for this is only partly to foster cross - border activity ; it is also, in my view, because it is in the interests of each of these countries to have well - functioning ( local currency - based ) markets. this is much less glamorous than talking about regional exchange rate initiatives, but for some time ahead at least, is likely to have more pay - off. i do not wish to speak against sensible thought being given to more