other developments contributing to the lower neutral rates, particularly lower potential growth rates, could be more permanent. global financial influences 8 / 11 bis central bankers'speeches in addition to the neutral rate declining, policy rates in other countries have been set even lower to provide the appropriate stimulus. on top of that, in a number of the major economies, policy is more expansionary than indicated by just the level of the policy interest rate. central bank balance sheets have expanded considerably as the central banks have purchased assets, in large part government debt ( graph 6 ). this program of asset purchases has finished in the us and the uk, but is still ongoing in the euro area and japan. the fact that monetary policy settings are more expansionary in the rest of the world than in australia, both through lower policy rates and balance sheet expansion, puts upward pressure on the australian dollar. capital is attracted by the higher rates of returns on offer here, which is likely to lead to an appreciation of the exchange rate. so, while an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the australian economy, an appreciating exchange rate works against this. to put it in economic terms, there are offsetting income and substitution effects for the australian economy. whether this is positive or negative in net terms for australia is an empirical issue. 10 generally, the evidence suggests that widening interest rate differentials do lead to an appreciation of the australian dollar. so that does counteract the benefit to the australian economy of faster global growth. it is conceivable that unconventional monetary policy may have a larger financial impact than movements in interest rates. 11 that is, the effect of unconventional policy through the exchange rate channel may be larger while the effect in terms of higher output may be smaller. again, it is an empirical issue. central bank asset purchases generate cross - border capital flows from investors seeking higher returns. some of that we see directly in a higher australian dollar exchange rate. but some of those cross - border flows are not quite so obvious. investors often tend to hedge their exchange 9 / 11 bis central bankers'speeches rate exposures to protect their offshore investments from exchange rate movements. as these investments increase there is more demand for such hedges, which causes the cost of hedging to increase. a direct measure of this is the cross - currency basis, which i spoke about recently. 12 for example, the relatively wide yen basis in part reflects the increased capital

by simply not making foreign exchange available to them. the outcome looks to have been a good one, from the point of view of debtor and creditor. as soon as the rescheduling was made public, the climate in financial markets markedly improved. who, among the creditors, could now complain, as they received the certainty of getting their money back plus a higher interest rate? looking back on it, the only element that might, with hindsight, have been done differently - and this is the forward - looking lesson that might be learnt from this experience - is that there might have been a case for a “ hair - cut ”. these issues are far from settled and there is certainly no acceptance on the part of the private sector, in general, that they should be bailed - in. but, having shifted its position quite a bit over the past couple of years, the imf is working quietly and steadily to establish precedents - and case studies - for how this might occur. the present focus is on a number of cases where the private sector holds sovereign debt, with ecuador providing perhaps the most interesting example. there is a belief that the fund, if not actually encouraging ecuador to force another rescheduling, has accepted this as the way to go. this is still quite a big step away from the sort of rescheduling of bank - to - bank private debt that would have been relevant in the asian case. but at least this is moving in the right direction. we all should support these efforts. will this, together with the other changes which have been made to the international architecture, be a sufficient change to do the job? if “ doing the job ” means that future crises will be averted, clearly not. but the real issue is not whether crises can be averted, but whether we have done as much as possible. on this, it would be easy to share the views of dr sakakibara who says that it will take a couple more crises before we put in place an adequate system of international financial architecture. i have an open mind on this, partly because a lot can be done within the existing architecture to make it much more stable. the biggest contribution would be for the capital - receiving countries to put great effort into strengthening their own financial systems, and their legal and accounting frameworks as well. this will take quite a bit longer than might have been apparent from the reform timetables laid down for a number of these countries -