drastically against the dollar and the yen, and the carry positions had to be settled quickly. during the recent crisis the currencies in “ high interest rate countries ” such as australia and new zealand weakened substantially against “ low interest rate countries ” such as japan and the united states, which once again led to a speedy settlement of carry positions. one contributory factor to the inflows of capital to the emerging markets in asia and latin america, as i mentioned earlier, is the relatively low interest rate levels in the “ old ” industrial nations in north america and europe. the low interest rates in, for example, the united states, make it profitable to borrow dollars in order to invest in other currencies that provide a higher return at given exchange rates. several of the countries that are now experiencing capital inflows are unwilling to allow their currencies to appreciate against the us dollar despite the fact that the inflows are creating appreciation pressures. this is understandable in the light of experiences from, for instance, the asian crisis. exchange rates can be come highly volatile if they are completely adapted to highly volatile capital flows. but at the same time, the unwillingness to allow the exchange rate to appreciate probably strengthens tendencies towards capital inflows, as it enables speculation in carry trade, as i described earlier. let me now leave the “ speculative ” element of the foreign exchange market and talk about the more long - term development of the exchange rate. while it is admittedly difficult to forecast developments in the short term, there are some research results that can be used as a starting point for assessing developments further ahead. the riksbank ’ s forecasts have primarily been based on these results. 20 nominal and real exchange rates while the nominal exchange rate shows the number of swedish kronor per unit of foreign currency, the real exchange rate shows the relationship between swedish and foreign price levels. put simply, one can say that the real exchange rate shows how much a given basket of goods costs in sweden in relation to abroad when the price of the basket of goods is expressed in the same currency. the real exchange rate can change either through the nominal exchange rate changing or by inflation differing between countries. a stronger krona real exchange rate can thus be attained either through a stronger nominal exchange rate or through a faster increase in the price level in sweden than in other countries. we can use the economist ’ s big mac index as an example. this index shows how much a big mac costs

and crises delaying the economic upturn most analysts predict to be on its way? have economic policy, the financial infrastructure and the behaviour of market operators been adapted to the globalised, technologically well developed financial markets to the extent that the contagion effects on the real economy of financial disturbances has declined significantly during the past decade? these are questions i wish to discuss now, however more with the aim of provoking some interesting ideas rather than providing any ready - made answers. are the markets more robust? let me begin with the question of whether the markets have really become more robust, in the sense that they are now less sensitive to disturbances. there are some arguments in favour of this theory. one of these is directly linked to monetary policy and inflation. this is namely that an increasing number of countries have abandoned the ambition of maintaining a fixed exchange rate and chosen instead to focus their monetary policy directly on an inflation target. openness and transparency have increased as a result of this, which in itself has probably improved the functioning of the markets. inflation rates and inflation expectations have fallen and become more stable, which has led to significantly lower nominal rates. uncertainty with regard to the future has thereby declined and the conditions for making the right investment and savings decisions have improved. all of this should have increased the stability of the markets. however, there are other arguments. greater awareness of the need for maintaining central government finances under control has increased budgetary discipline and led to reductions in central government debts in most countries. it could possibly be claimed that the stricter budgetary discipline is a rather last - minute conversion, as countries with large deficits are often forced to borrow on the international markets and there submit to the requirements made, in only to keep down the loan costs. large, growing budget deficits also reduce the possibilities for parties other than the central government to assess the future and increase their costs. borrowers are forced to pay high and varying risk premiums to borrow on the bond markets, as financial investors want to be paid for the uncertainty regarding the inflation rate or exchange rate. in addition, there is always a risk that if the debt becomes too large the central government will be forced to implement large savings that will in themselves lead to increased unemployment and poor profitability for domestically oriented companies. large international efforts have been made and are being made to create new regulations and standards that will reduce the risk of financial instability in a deregulated environment. the basel committee's new capital adequacy rules