, to have in place sound prudential regulation during periods of abundance of capital is essential for financial stability, as we are reminded by the crisis in chile in the early 1980s, the mexican crisis of the mid - 1990s, the asian crisis, and more recently, the crisis in eastern europe. even if one could accept that monetary tightening could be an appropriate response to combat an asset price bubble such as the recent housing price bubble, with all the caveats i discussed before, the problem is more acute in small open economies. tightening monetary policy may have perverse effects, since it induces further capital inflows and strengthens the currency. in this case, the interest rate is not the most adequate instrument with which to burst the bubble. indeed, the perverse dynamics are as follows : high interest rate differentials induce capital inflows to arbitrage those differences ; then policymakers strive to avoid the appreciation, which in general is thought to be transitory, since the sustainability of exchange rate management is limited ; the incentives for inflows increase as not only the interest rate differential is large, but also the expectations of appreciation ; finally, the appreciation takes place, which validates the expectations of arbitrageurs. this process goes for a while and may be accommodated gradually or ended by a sudden stop. in this process there are “ excess ” inflows and “ excess appreciation ”, and the issue is how to avoid those excesses. according to the simple dynamics i have just described a first line of defense to avoid excess fluctuations of capital flows is to maintain exchange rate flexibility. this prevents investors from speculating against an authority that will be defending the parity only transitorily. moreover, by introducing volatility it increases the risks of a one sided bet on the exchange rate. an inflation commitment may also help to stabilize flows. as i discussed before, massive inflows that appreciate the currencies will result in a loosening of monetary policy that should reduce the incentives for carry trade. in contrast, if capital inflows generate a boom of activity, without inflationary consequences due to the appreciation of the currency, there could be the temptation to tighten monetary policy, aggravating the problem of massive inflows. to control expenditure without increasing pressures on the exchange rate, fiscal policy should help. a credible inflation target with a flexible exchange rate regime should help to avoid the problems we faced during the 1990s. indeed, during the period of large capital in

co - chairing an ngfs workstream : ‘ net - zero for central banks ’ 13 with italy ’ s central bank – banca d ’ italia – covering three topics : sustainable and responsible investment ( sri ), central banks ’ own climate - related disclosures, and greening central banks ’ corporate operations. we hope what we learn in these collaborations will be of use not only to central banks, but to the financial sector as a whole. looking to the future in the five years since i spoke about the need for a longer - term view in the financial system, we ’ ve made solid progress on establishing necessary practices and procedures. but much more needs to be done. our own disclosure to help structure our thinking we ’ ve committed to developing our first climate - related disclosure. like the 200 or so entities across new zealand developing mandatory disclosures under the xrb ’ s new zealand climate standard ( nz cs 1 ), we fully understand that effective disclosure processes involve more than adding emissions data to an annual report or a declaration that we ’ ve talked to a consultant about the future climate. developing a meaningful disclosure requires an in - depth interrogation of how your organisation ’ s strategy and core functions are affected by climate - related risks. for us that is a slightly different ask – we need to look at our core functions as a central bank, including monetary policy, our balance sheet, currency and payment systems, and our actions as a prudential regulator and supervisor. monetary policy like central banks around the world, we are growing our understanding of how climate change, the macroeconomy, and monetary policy intersect. disruptive supply - side shocks like those from russia ’ s invasion of ukraine and the pandemic foreshadow potentially similar supply - side shocks from worsening climate impacts and an economy in transition. understanding the work to be done to transition to net zero will give us a sense of the potential impact on employment and inflation in new zealand. observing policy developments domestically and in other countries will help to develop our sense of how risks may affect the domestic economy. on the physical risk side, evidence for the macroeconomic significance of drought for the new zealand economy is well - established. _ _ _ _ _ _ _ _ _ _ _ _ ngfs publishes its 2022 - 2024 work program. ( 2022, may 30 ). retrieved from ngfs central banks and supervisors website : https : / / www. ngfs. net / en / communique - de