35 per cent of households owe money on their home. if we include debts of all kind, closer to 70 per cent of households carry debt of some kind, though many of these other debts are relatively small. differentials between countries do matter to exchange rates, along with expectations about how those differentials may change ( a function of growth expectations ), factors affecting trade positions ( such as commodity prices in our case ), investor risk preferences and so on. i have already discussed the case of petrol, but there is surely little doubt that the prices of tradable goods and services generally are lower today than they would have been if the exchange rate had been at its long run average level. this is the case even with much more muted short term pass through of exchange rate changes than we used to have. in other words, changes in the exchange rate alter the terms at which the rest of the world supplies goods and services to australia in a way that is stabilising for prices. all these are channels for monetary policy ’ s effects. they operate at different speeds, and to differing extents in different episodes – but they are all there, and i would say that they are all working at present. the transmission of monetary policy is not just about home loan rates, as important a channel as that is. secondly, to say monetary policy is a blunt instrument begs the question : where are the sharp instruments? it is not obvious that there are all that many. people mention supply side reforms of various kinds and unquestionably these have been extremely important over the years. to the extent that more can be done, that is all to the good for australians ’ standard of living. but they are long term. it is hard to deploy them in a hurry. and many of them are very general – “ blunt ” even – rather than specific. many people will appeal, perhaps not unreasonably, to the possibility of using fiscal policy to counter inflation pressure. for some time now, fiscal policy has not been actively deployed to manage the business cycle. the focus has mainly been on achieving and then maintaining a structurally sound, long run fiscal position and, subject to that, making tax and spending decisions aimed at various other objectives that governments have. this does not preclude allowing the budget ’ s “ automatic stabilisers ” to operate over the cycle ( though it might be observed that, with an elongated upswing like the one we have been having, it is getting more difficult to decide

country have a fixed exchange rate and free movement of international capital? 2. is the exchange rate over - valued? 3. has a country with similar economic characteristics recently experienced a currency crisis? 4. is there a large budget deficit and a lot of government debt outstanding? 1 " the asian situation : an australian perspective ", reserve bank of australia bulletin, march 1998. 2 we drew heavily on other work in this area, for example, morris goldstein, " comments on early warning indicators of financial instability in emerging economies ", federal reserve bank of kansas city ( forthcoming ) and graciela kaminsky, saul lizondo and carmen reinhart, " leading indicators of currency crises ", imf working paper, july 1997 5. is there loose monetary policy and high inflation? 6. is the domestic economy in, or at risk of, a recession? 7. is there a large current account deficit? 8. is there a large amount of foreign debt? 9. is there an asset price boom ( especially credit - driven ) occurring? 10. are there a lot of bad debts in the banking system, and a poor system of bank supervision? 11. has there been a lot of unhedged foreign currency borrowing? 12. are there poor accounting standards, few disclosure requirements, ambiguous bankruptcy procedures, etc.? a brief scan of this list should reassure people that australia is in good shape. that is, it would receive a very favourable mark on the vast majority of these indicators, and so should be able to handle the current international turmoil without too much disruption. but we are not perfect, and there are two items on the list - the current account and external debt - where our score is low by international standards. in the remainder of my talk today i would like to set out in more detail how australia stacks up against the above list, starting with the ten factors on which we receive a very high score, and following roughly the same order as in the list above. i will cover the factors where we receive a high score quite quickly in order to leave room for a closer examination of the two weak points. 3. australia ’ s strengths australia allows the free movement of international capital, but we certainly do not have a fixed exchange rate. the australian dollar was floated in december 1983, and after a few years of turbulence in the mid 1980s, has generally behaved as a floating rate should in the period since then. while it was more volatile in the 1980s than the major currencies such