rules of the game. as i said yesterday in new york in the context of global imbalances, we now see examples of industrialized countries following policies that impede market forces — for example, restrictive labour policies in europe. we have also seen unsustainable fiscal policies here in the united states. in canada, we still have restrictions on foreign ownership of firms in certain sectors. and recently, we have seen legislators in the united states and europe propose new restrictions on foreign investment flows. again, the imf as umpire should not shy away from making tough calls whenever they see the rules being violated, be it with respect to trade, capital flows, or other policies that distort financial markets. making these calls loudly and forcefully could, as i said, help imf members apply pressure for policy reform, and could certainly help the market to apply its own pressure, thus maximizing the chances that welfare - enhancing, market - based policies would be adopted. in a world where stability can be easily threatened by capital flows, we need to have a better sense of national balance sheets, a point that bank of england governor mervyn king recently made. 6 surveillance needs to answer questions such as : what is a country's net foreign asset position? how is it being financed? what are the currency and maturity mismatches? the goal is to better integrate financial sector surveillance into country reviews so that potential risks are identified earlier. this quoted by m. king, " reform of the international monetary fund. " speech to indian council for research on international economic relations, new delhi, india ( 20 february 2006 ). t. adams, " working with the imf to strengthen exchange rate surveillance. " speech to the american enterprise institute, washington, d. c. ( 2 february 2006 ). m. king, op. cit. would also help the imf in its secretariat role, allow national authorities to address problems early on, and give capital markets more information to help them price risk appropriately. earlier, i spoke about the need for capital markets in emerging - market economies to fully emerge. ultimately, we hope that all countries will develop capital markets and the infrastructure to allow them access to global private investment flows. but in the transition period, we need to bear in mind that these markets work imperfectly at best, and are susceptible to overshooting and sudden reversals of capital flows. the imf, therefore, has a role to play in furthering financial market development through

in less than three months, and the money supply grew rapidly at a time when the domestic economy was already operating at capacity. ultimately, canadian authorities decided that the best way to resolve these emerging imbalances was to let the canadian dollar float. the alternative would have been higher inflation. 3 one of the key lessons the canadian authorities learned was that in an open economy, a marketbased floating exchange rate was not at all incompatible with the goal of free international markets for goods and services. indeed, we came to realize that allowing the relative price of the currency to be set in the market meant that we could concentrate on conducting monetary policy in our own best interest, rather than being preoccupied with aiming for balance in our external current account. in a rapidly changing global economy, it did not make sense to assume that the " correct " exchange rate could ever be known in advance. and even if the correct exchange rate could be identified at a point in time, the economic situation would soon change, and the level of the pegged exchange rate would no longer be appropriate. a market - based exchange rate proved to be useful as a " shock absorber, " helping the economy react to shocks more efficiently than a fixed exchange rate. r. rajan, " the ebbing spirit of internationalism and the international monetary fund. " the 2006 krasnoff lecture, stern school, new york university ( new york, 8 march 2006 ). after repegging the canadian dollar in 1962, canada again chose to float its currency in 1970. for a thorough discussion of the canadian dollar through the bretton woods era, see j. powell, a history of the canadian dollar ( ottawa : bank of canada, 2005 ). the evolution of the world economy and the role of the imf in 1971, the bretton woods system collapsed. domestic capital markets in many countries had been restored and modernized. as well, there was recognition by some major industrialized economies that the bretton woods paradigm wasn't working. but the alternative was not yet clear. just as central banks around the world spent much of the 1970s and 1980s searching for a monetary policy anchor, much time was spent searching for a new framework for the international financial system. by the 1990s, policy - makers — particularly in the oecd countries — started to come around to the idea that a framework of market - based policies was best both for national economies and for the global economy. this shift in paradigm, from the distrust of markets to