the margin is defined as the difference between disposable income and basic living costs as well as debt repayment costs ) for the case of poland. although the average margin has not declined despite the rapid credit growth in recent years, stress tests have shown that households that repay debt are rather vulnerable to adverse financial and real shocks. specifically, economic slowdown, monetary policy tightening or financial market turbulence would each bring about a reduction in the households ’ average margin and cause a non - negligible percentage of households to fall into a negative margin. this would probably lead to a deterioration of banks ’ asset portfolio – a result that cannot be ignored by monetary policymakers and bank supervision authorities. another result that is of high relevance to monetary policy is the substitution effect between domestic and foreign currency denominated loans, which has been the focus of a paper9 presented in session 2. the high percentage of foreign currency indebtedness, mostly mortgage debt, that can be observed in many cee economies shows that domestic and foreign currency loans are treated as close substitutes in these countries. as households generally do not hedge against foreign exchange risk, their debt servicing burden rises when the home currency depreciates. admittedly, depreciation of cee currencies has hardly been an issue in the recent past ; the currencies in the region have either stable exchange rates ( when these are pegged ) or tend to appreciate ( when the exchange rate regime allows it ). however, concerns remain that under such conditions, domestic monetary policy cannot egert, b., mihaljek, d. : determinants of house prices in central and eastern europe, bis working paper no. 236, september 2007. zajaczkowski, s., zochowski, d. : housing loans growth, foreign currency risk and supervisory response : the polish case, mimeo, november 2007. brzoza - brzezina, m., chmielewski, t., niedzwiedziska, j. : substitution between domestic and foreign currency loans in central europe, mimeo, november 2007. effectively control the growth of credit due to the substitution effect : monetary tightening at home does not lead to a slowdown of total credit growth, but rather to increased foreign currency indebtedness. the analysis in the paper has identified the existence of this effect in the case of three largest cee economies. generally, most papers presented and discussed over the last

the federal reserve ’ s commitment to low inflation seems to have limited the pass - through of higher energy prices to wages and inflation expectations. indeed, despite some rapid increases in benefit costs - most notably for health insurance and defined benefit pension plans - overall hourly compensation has been rising at roughly a 4 percent annual rate this year, similar to last year ’ s pace. similarly, surveys of inflation expectations and implied inflation compensation from treasury indexed security yields suggest that longer - term inflation expectations have been well anchored over this period, and short - term inflation expectations have actually eased on balance since midyear despite the rise in energy prices. looking ahead, economic fundamentals are consistent with the u. s. economy posting solid growth over the next year. indeed, most forecasters expect that output will continue to rise next year at a pace similar to this year ’ s. for example, the most recent blue chip forecast sees output rising at a 3 - 1 / 2 percent rate in 2005, just a touch slower than their forecast for growth over the four quarters of this year. with regard to inflation, the blue chip participants see the rise in the consumer price index slowing from 3. 2 percent this year to 2. 2 percent over the four quarters of 2005. there are a number of reasons for this reasonably favorable outlook. first, monetary policy remains accommodative, even with the rise of 100 basis points in the federal funds rate since late june. the nominal federal funds rate is currently 2 percent, a level that, using standard measures of core consumer price inflation, implies a real funds rate that is just above zero - considerably lower than the long - run average of about 2 - 3 / 4 percent. of course, this long - run average may differ from the level of the real federal funds rate that is currently consistent with moving economic activity into line with its potential and keeping inflation low and stable. but even taking into account possible factors that would tend to push down the equilibrium rate - for example, business pessimism, energy prices, and our net export position - the real funds rate still seems low. second, financial conditions in general look to be supportive of continued solid economic expansion. in addition to benchmark real interest rates being low, risk spreads are quite narrow, and lenders appear very willing to provide credit to businesses and households. moreover, many businesses, through their actions to repair their balance sheets in recent years, have built up large holdings of cash that can be tapped to finance investment outlay