international economics, 2005 ), 373 - 407. goldstein argues that surveillance by the international monetary fund needs to focus more on debt sustainability. however, it would be naive to think that we will never again see situations where an international lender will be indispensable. the past few years have been unusual ones, providing ideal conditions for strong growth in emerging markets. in particular, growth in industrial countries has been solid, borrowing costs have been very low, and commodity prices have been high, not just for fuel but also for many of the primary metals and agricultural products that are produced in developing countries. many countries have taken advantage of these developments to pay down debt and consolidate fiscal balances. nevertheless, concerns remain. numerous economies are vulnerable to changes in commodity prices or slower world demand. this is particularly true for countries that have not improved their financial and regulatory infrastructure and that have adopted policies that stifle investment. in some countries, corporate and household debt levels have increased greatly. for example, one troubling development in the past few years has been the sharp rise of home mortgage lending in foreign currencies, particularly in eastern europe. this development threatens to unwind the progress made in reducing currency mismatches by shifting the locus of the mismatch from the government or financial sector to the household sector, in which market participants are less well equipped to understand the risks they are taking on. and, more generally, we are increasingly realizing that globalization and the growth of markets have led to complex and occasionally surprising interconnections among markets and economies. individual countries and regional institutions can track these developments to some extent, but the need to have institutions devoted to international monetary and financial stability on a global level has perhaps never been greater. given a need for lenders of last resort, the question remains, what institutions will best fill that role? the answer is that it is likely to be best filled by a combination of institutions. in some cases, as we have just seen, individual countries, particularly the large industrial countries, will be able to provide liquidity to markets that are domestically based but global in their linkages. to a much larger extent than in the recent past, countries are also working to insure themselves through the accumulation of foreign currency reserves. in the past few weeks, we have seen such reserves being used in the industrial and developing worlds to dampen volatility in exchange rates. also, talk of regional arrangements such as the chiang mai initiative for currency cooperation in

losses. policymakers with short term horizons include politicians seeking election. a central bank which is not independent of political interference would face pressure to pursue expansionary monetary policies which generate short term gains in output at the expense of higher inflation in the future. granting operational independence to the central bank is, therefore, an institutional mechanism to insulate the central bank from pressures to undertake actions which would have damaging long term consequences, and thus can deliver better monetary policy over the long term. moreover, monetary policy is likely to have more credibility with the private sector if the central bank is insulated from political pressures. in turn, the greater credibility of monetary policy means that the private sector is likely to take a more optimistic view of inflation prospects and, as expectations about inflation are to some degree self - fulfilling, this will help to bring about lower inflation. 4. the separation of fiscal and monetary policy the implementation of monetary policy and bank regulation does not, in general, have significant distributional consequences. for example, an increase in the policy interest rate has macroeconomic affects but it does not usually favour one section of the population at the expense of another. if the implementation of monetary policy and bank regulation had significant distributional consequences, the operational independence of the central bank would be much more problematic, because distributional issues should be determined in the domain of politics, not by technocrats alone. in contrast, fiscal policy is intrinsically distributional in its consequences. how taxes are raised and where government spends public resources does not have an equal impact on all bis central bankers ’ speeches citizens. consequently it is imperative, in a democracy, that elected politicians are closely involved in determining the details of fiscal policy. for example, in uganda all government expenditures must be approved by parliament, as must all public borrowing and all changes to tax policy. this principle is enunciated in the ugandan constitution. given that fiscal policy has distributional consequences and requires parliamentary approval if it is to command political legitimacy, it is imperative that the central bank is not expected to undertake policies which are quasi fiscal in nature, such as providing subsidised credit from its own resources to industries or firms which are regarded as priorities for development. if government desires to pursue such policies, they should be implemented through the government budget, after the necessary parliamentary approval has been obtained. it is essential to maintain a strict separation between monetary and fiscal policies. sound macroeconomic policy also requires the avoidance of “ fiscal dominance ”, which refers to government persistently borrowing