of financial integration and innovation in the propagation and – in certain cases – the amplification of shocks and have raised questions about their overall contribution to financial stability and macroeconomic volatility. so what answer can we give to the question i raised and what are the policy implications? at a theoretical level, the impact of financial integration and innovation on stability could be ambiguous. the main effects of these processes, such as improved risk - distribution and risksharing, should reinforce stability ; but they also involve mechanisms and effects that might amplify instability, for instance by increasing the probability of contagion. however, these latter effects cannot be looked independently of the influence of other factors, such as the prevailing risk management practices, or the incentives embedded in the business models of banks and other financial market participants that have a bearing on the distribution, accumulation and containment of risks in the financial system. the key issue – which is not only of academic interest, but also of policy relevance and of a sensitive political nature – is this : are the processes of financial integration and innovation to be blamed, at least in part, for the recent market volatility? or other factors or elements of the financial system are the main culprits because they have helped build up the imbalances, triggered the turmoil, contributed to the amplification of shocks and account for the uncertainty surrounding the likely duration and magnitude of the adjustment process. the underlying causes and other contributing factors to the financial market turmoil have been analysed and discussed extensively by policy - makers and market participants. recently, the financial stability forum ( fsf ) submitted an interim report to the g7 financial ministers and central bank governors which includes an analysis of the causes of the recent events and of weaknesses in the functioning of the financial system that have been revealed by the market turmoil. it is useful to distinguish between, on the one hand, general and underlying factors that have contributed to the emergence of imbalances and the accumulation of risk exposures and, on the other hand, specific factors and system features that played a role in this process and which triggered the turmoil and amplified its effects. the general and underlying causes include the exceptionally benign macroeconomic, financial and monetary conditions over the past four years – until the summer of 2007 – that had contributed to reducing risk aversion and market volatility and had fostered a “ search for yield ” and rising leverage. financial innovation also played a role because the unprecedented growth of the securitis

is difficult to test counterfactuals. we cannot go back in time and conduct an experiment where we kept on aiming for the top of our target range rather than the middle. we do, however, have a study where two economists constructed a counterfactual model. 25 their work compares actual outcomes with how the economy was likely to proceed without the 4. 5 % change. the results make for interesting reading. perhaps the most striking is, they find no reduction in aggregate demand during the move to 4. 5 %. growth in gross domestic product ( gdp ) is in line with the counterfactual. unemployment is generally unaffected. credit extension is higher. their conclusion is that there was little or no cost to getting inflation to 4. 5 %. and the explanation they provide is that the sarb ’ s commitment to 4. 5 % was heard and understood. inflation was not forced down by a recession ; it was managed lower by clear and credible communication. this conclusion lines up with another study, by sarb economists, of sacrifice ratios in south africa. 26 a sacrifice ratio is the cost of reducing inflation, measured as the amount of gdp growth lost for each percentage point of lower inflation. for the period where we moved inflation to 4. 5 %, this study finds a negative sacrifice ratio, which means there was no cost. the authors also find that disinflation costs have generally been low in south africa. this is, once again, contrary to the popular intuition that lower inflation is achieved by slower growth and higher unemployment. and once again, the key seems to be the sarb ’ s credibility and communication. if the public understands and believes the central bank ’ s objectives, disinflation can be achieved with little or no pain. ladies and gentlemen, let me conclude with a summary of the lessons learnt, which should be informing our current conversations. e pirozhkova and n viegi, ‘ change of the sarb ’ s preferred inflation target in 2017 : the conditional forecast story ’, sarb occasional bulletin of economic notes no. 2401, april 2024. https : / / www. resbank. co. za / content / dam / sarb / publications / occasional - bulletin - of - economicnotes / 2024 / change - of - the - sarbs - preferred - inflation - target - in - 2017 - the - conditional - forecast - story - april2024 - 01. pdf c loewald, k ma