this, of course, we have sought to do. following the asian financial crisis we took a large number of measures to improve the functioning of the currency board, and the efficiency of the financial infrastructure in hong kong more broadly. we also continue to monitor and improve our system of banking supervision, in recognition of the fact that one reason we did ride out the asian financial crisis was undoubtedly that banks were strong. some observers have suggested throwing some sand in the wheels of international finance. by limiting capital flows, the argument goes, it becomes easier for central banks to maintain monetary and financial stability in turbulent times and to cope with the potency of international finance that comes with globalisation. indeed, control in one form or another has become quite popular in this region. but, for an international financial centre such as hong kong, whose main source of income stems from an ever - growing economic and financial integration with the rest of the world economy, such a policy is, to us, clearly undesirable. moreover, the basic law of hong kong also bars any foreign exchange control policies and any restrictions on the free flow of capital within, into and out of hong kong. others suggest that the hong kong economy would be better able to withstand economic shocks and disturbances if the currency board was adjusted or gave way to something else : different observers have different pet ideas and there seems to be no agreement on what that alternative would be. i have spoken a great many times on this topic and i do not propose to do so again today. let me just say that i remain convinced that the currency board has remained a fundamental source of stability for hong kong in the 239 months of its existence since it came into being in october 1983. what else can be done to ensure monetary and financial stability not just in hong kong, but also in this rather fragmented and diverse region, in terms of geography, size of markets, culture and stages of economic development? to my mind, much greater regional co - operation in the monetary and financial arenas should be on the policy agenda. such co - operation can take many forms, ranging from increasing and more open interactions between central banks in the asian region for the purpose of enhancing the stability, integrity, diversity and efficiency of financial intermediation in the region, and admittedly very much further down the road, to serious discussions of whether monetary integration and the establishment of an asian monetary union should be a goal. but to do that, we need to build stronger personal links between economists working on monetary

supply - related price shocks. the low inflation rate has also permitted central banks to respond more forcefully to output fluctuations and more opportunistically to ensure low and stable prices. the improved inflation performance has come not at the expense of, but in conjunction with, output stability. researchers have documented the so - called great moderation, in which the u. s. economy has achieved a marked reduction in the volatility of both real gross domestic product and core inflation over the past twenty years or so. most economists would probably attribute at least some portion of the great moderation in the growth of real output to monetary policy. despite the record of steadier economic performance, bouts of financial market instability continue to arise. indeed, in my judgment, the inexorable march of technological change and creative destruction in a market economy all but assures the occurrence of such episodes ( schumpeter, 1942 ). to be sure, it is the recurrence of such episodes that supplies kindling to the debate on the appropriate balance between flexible, competitive financial markets and regulations that could limit the exuberance of market responses, irrational or otherwise. in the episode at hand, early - cycle increases in housing prices, escalating returns of leveraged buyouts, and lower all - in financing costs made possible by structured - finance products highlighted new profit - making opportunities for providers and users of capital. as economic historians remind us, more entities are thus drawn into the activity until competition pushes its boundaries beyond the point of positive returns ( kindleberger, 1996 ). eventually, some shock to the system exposes the fragility, and the shock is often followed by fear and overreaction before a new equilibrium is established. in these circumstances, financial markets often suffer from episodes of widespread illiquidity amid a rise in risk aversion among investors. policymakers and market participants know with certainty that investors'risk perceptions and preferences will change and that stresses will recur, but predicting their onset, scope, or duration is exceedingly difficult. surely, policymakers and market participants have advanced in their knowledge and in the adaptability of their tools to help mitigate these negative effects on real economic activity. but as the events of 2007 make clear, the latest chapter in economic history should remind us of the habitual, but perhaps not immutable, drivers of human behavior in financial markets. recent financial developments the consequences of the liquidity shock of 2007 on the financial markets