in the early 1970s and did not handle it successfully. at that time, australia briefly experienced a current account surplus and also became a favourable destination for capital flows. as the money poured in from both these sources it had to be sterilised or it would flow directly into the banking system and through that into money and credit aggregates, with obvious inflationary results. the problem we found was that in order to sell the official paper in sufficient volumes to soak up the inflow, interest rates had to be raised, and this induced further inflow. in the end, the monetary aggregates grew too quickly and inflation soon rose to an unacceptable rate. we came to the conclusion then that it was not possible to restrain an over - exuberant and inflation - prone economy only by domestic tightening. exchange rate adjustment was required in order to take away the'one way bet'aspect of the exchange rate. we eventually did this, but we were too slow and the inflation had already become entrenched. so far, china has made a much better job of handling this situation than we in australia did 30 years ago. and, of course, it is made easier by the fact that it is occurring in a world environment of low and stable inflation rather than the rising inflation of 30 years ago. but, ultimately, i think the point will be reached where domestic restraint has to be augmented by action on the exchange rate. sterilisation is not as easy as it sounds. if all the central bank does is sell official paper to the commercial banks at a below - market interest rate, it is not really sterilisation. it merely exchanges commercial banks'balances at the central bank for central bank paper, but does not offset the initial increase in bank deposits caused by the official purchase of foreign currency. for sterilisation to offset the initial rise in bank deposits, the official paper must be sold at an interest rate that attracts nonbanks to withdraw deposits from the commercial banks in order to buy the official paper. this is rarely done because it would push up interest rates and attract more inflow. instead, countries usually rely on a combination of raising reserve requirements and direct lending guidelines to limit the growth in banks'balance sheets, and hence the money supply. these have their own set of problems for both commercial banks and / or central bank profitability, and hence cannot be maintained indefinitely. ultimately, the inflow of foreign funds through the current and capital accounts has to be reduced through a

gentlemen, when we look at things from an economic perspective, what is known as potential growth is a particularly relevant factor. potential growth is normally defined as the aggregate growth that can be achieved when utilisation of all production factors is normal over time. economic potential growth cannot be observed directly, meaning it cannot be measured directly either. instead, it has to be estimated as precisely as possible. i don ’ t intend today to go into the methods used and the imponderables they entail. however, i think the connection between demographic trends and economic potential growth can be summed up with the following words. regardless of the uncertainty surrounding estimates of this kind over long periods of time, german potential growth is likely to be weaker in future than in past decades due, above all, to the demographics - driven decline in the number of hours worked. bis central bankers ’ speeches and yet, the question does arise in this context whether, given the declining and ageing society, the expansion rates of past decades can serve as a suitable yardstick for advanced economies. ultimately, however, this has been a valid question in germany for quite some time now. if we compare the average growth rates of the last few decades, we find a consistently downward trend. in the 1970s we were at just under three per cent. since the turn of the century, it has been little more than one per cent on the whole. thus, when looking ahead, it would probably be more useful to adopt a per capita perspective and compare germany ’ s relative growth position with that of similar countries. but such a forward - looking comparison does not put germany in a particularly good light either. according to estimates by the oecd in its report entitled looking to 2060, the german economy will generate the second slowest growth of all 42 countries in the study in the period up to 2030, and the slowest growth up to 2060. per capita growth looks somewhat better because of the falling population. however, here too, germany is mired in mediocrity by european standards, according to the oecd. faced with these prospects, our economic policy - makers would do well to follow the path of sustained growth all the more vigorously and hence to fight back. to this end, measures need to be taken which heighten the ability primarily of the private sector to adapt, innovate and invest. there are ultimately a number of different approaches towards achieving those objectives. these include the areas i have already looked