rundheersing bheenick : bank of mauritius – brief review of activities in speech by professor rundheersing bheenick, governor of the bank of mauritius, at the launching ceremony of new notes and coins, port louis, 6 december 2007. * * * i welcome you all to this finale of the celebratory events of our 40th anniversary year. over the last four months, on a more serious theme in our festivities, we have had a series of lectures on banking, money and finance. professor bishnodat persaud addressed us from the west and spoke on trade, finance and currency. this was preceded by two reviews of monetary policy from sweden by professor stefan gerlach from the bank for international settlements, which is the central bank of central banks. then, from switzerland, we had professor philippe bacchetta on financial market development and economic growth. this week, we had a fascinating review of the changing axis of global finance and the rise of india and china by dr y. venugopal reddy, the governor of the reserve bank of india. finally, only yesterday, we had a special address at the bank from my good friend dr paul acquah, governor of the central bank of ghana who covered the raging debate on the performance of the imf over the past decades. the heart of our job, or rather what we formally call our corporate responsibility, is to contribute to and i quote from the bank of mauritius act 2004 : “ the orderly and balanced economic development of mauritius ”. as part of this, we are giving special attention to the importance of being a good corporate citizen. one special moment for me was in laying the foundation stone of our new building in rodrigues to better serve the large community of our sister island. but the corporate function probably works best when it is done with a lighter heart and a looser step than was the practice of bankers of the distant past with their bowler hats and their pin stripe suits. let me mention now some of our other activities in this anniversary year. • we have launched what we called originally a “ financial literacy and outreach programme ”. now, if you mull over the acronym of a “ financial literacy and outreach programme ”, “ flop ”, you will understand why we changed this name to “ consumer outreach programme ”, for “ cop ” sounds better than “ flop ”. • we have opened our doors to over - the - counter sales of security bills and bonds. • we

the contrary, there will need to be increasing coordination between monetary and fiscal policies. central banks will have to take into account fiscal compulsions in their monetary stance while governments will need to commit to strict fiscal responsibility. to ask therefore how monetary and fiscal policies can go their separate ways is the wrong question. what is the right question? i submit the right question is : how can we coordinate fiscal and monetary policies to achieve the planned outcomes? inflation targetting i will now move to the third issue – inflation targetting. in the years leading to the crisis, central bankers had nearly declared victory. they had found the holy grail of stable growth, low inflation and low unemployment through a rule based monetary policy that targeted inflation rather than monetary aggregates. the much celebrated great moderation had delivered. the crisis at once hurt the central bankers ’ pride and shattered their confidence as the great moderation unravelled. monetary policy was found wanting in delivering financial stability. the undoing was the reluctance or failure of central banks to acknowledge increasing asset prices. the monetary stance of studied indifference to asset price inflation stemmed from the now notoriously famous greenspan orthodoxy which can be summarized as follows. first, asset price bubbles are hard to identify on a real time basis, and the fundamental factors that drive asset prices are not directly observable. second, monetary policy is too blunt an instrument to counteract asset price booms. and third, a central bank cannot presume to know more than the market. the surmise therefore was that the cost - benefit calculus of a more activist monetary stance of “ leaning against the wind ” was clearly negative. it is more cost effective for monetary policy to wait for the bubble to burst and clean up afterwards rather than prick the bubble in advance. the great unravelling has, however, shattered the intellectual consensus around both inflation targeting and the greenspan orthodoxy on asset price build up. the crisis has made two things clear. first, the policy of benign neglect of asset price build up has failed. second, price stability does not necessarily deliver financial stability. where do we in india stand on inflation targetting? over the last few years, there has been an animated debate in india on inflation targeting fuelled by two influential studies, one by percy mistry and the other by raghuram rajan. while mistry strongly urged that the gold standard for stabilizing monetary policy is a transparent, independent, inflation - targetting central bank, rajan held that reorienting