“ right ” regime that applies to all cases and all points in time. experience has shown that no currency arrangement can compensate indefinitely for imperfections elsewhere in an economy, such as weaknesses in financial supervision, an excessively loose fiscal stance or inflexible wages and prices. furthermore, no exchange rate regime can offer full insulation from cross - market spillovers, particularly where the free movement of capital is allowed. nevertheless, certain policy combinations can make things far more dangerous. fixed, but adjustable, regimes look to be particularly fraught with perils when combined with shortcomings elsewhere, not the least of which are the severe after - effects that always seem to follow their forced abandonment. official reserves can, at times, play a helpful role in the equilibrating process under either fixed or managed floating rates, but considerable caution is needed here. clearly, large - scale sterilized intervention has a poor track record as a crisis avoidance tool. to be sure, history is replete with examples of how quickly a once comfortable reserve cushion can dissipate when countries attempt to buy stability rather than earn it by adjusting policy. nonetheless, markets often seem to take comfort when authorities are perceived to step in with “ judicious ” market smoothing. here again, credibility is key in assuring market participants that the central bank ’ s focus is on preventing disorderly markets rather than on trying to manipulate market prices. as you are aware, much of the emerging world has moved toward floating rates in recent years. for those countries that have made the change in east asia, it would appear that the new monetary / exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. inflation is in the very low single - digit range in all of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short - term interest rates that have declined to historically low levels. moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. but if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. in this regard, i would note that some countries have looked to inflation targeting as a framework to accomplish that end. and indeed, inflation targeting would seem to have much to recommend it, provided that it is approached not as a pan

as well as identify and remove barriers to longer - term and / or equity capital flows. the second line of defense is effective market discipline, an increasingly important ally of policymakers in a global marketplace. of course, market discipline must be supported by substantial disclosure, sound accounting standards, and an efficient and credible legal framework. on the last point, while some foreign investors have too frequently made allowances for “ special ” local practices during periods of economic boom, only strong and proven attitudes towards law, taxation, disclosure and the like provide the kinds of protections most long - term investors want and should insist upon. while effective bank - level management and meaningful market discipline are crucial elements of an overall strategy for promoting and preserving financial stability, neither can substitute for the critical role played by official supervision. the basel committee on banking supervision, which i chair, has identified the necessary ingredients of sound supervision, and these principles must be applied to all internationally active banks within a more dynamic, risk - based and process - oriented framework. the role of a sound and stable macroeconomic environment a sound and stable macroeconomic environment is also crucial for financial stability, and more generally for promoting sustainable growth. the converse - macroeconomic overheating - raises the likelihood of an eventual crisis, first by promoting excessive, and eventually unsustainable, external and internal borrowing. the next step inevitably is the correction to the real economy, interest rates and / or the exchange rate, that can sharply worsen asset quality and expose the accumulated weaknesses in the financial system. role of central banks in promoting stability and growth a central bank ’ s most important role in achieving stable, long - term growth involves promoting price stability. achieving long - run price stability is a difficult and continuous challenge, as it requires constant efforts first to detect and then to correct the building up of internal and external imbalances. moreover, because of time lags in policy effectiveness, authorities often have to take action based only on partial evidence, well before adverse symptoms are fully evident. the principal reward for forward - looking policy is that changes in policy, and associated stresses they engender, are generally smaller and more easily assimilated by markets. the effectiveness of monetary policy naturally brings us to the question of monetary and exchange rate regimes. a great deal has been said in various forums about the choice of monetary and exchange rate regimes. i believe it is crucial that there be consistency between a country ’ s choice of currency regime and its other policies. there is no