objective will before 1999 be operationalized and quantified in a way that is meaningful and understandable to the markets and the public at large. the ecb ’ s monetary policy will be geared towards a “ domestic ” objective, internal price stability within the euro area while the euro is allowed to float against other world currencies. the fact is that the share of foreign trade in gdp for the euro area is approximately the same as for the us, about 10 per cent, so the exchange rate will probably not have much of an impact on the euro area price stability or the monetary policy stance, even indirectly. certainly, it would be expedient to quantify and to announce the target “ price stability ”, for example, in the form of a target range or an approximate value. this, and what kinds of intermediate monetary aggregate targets could or should be used to communicate the monetary policy stance to the markets, the public and policy - makers, are still under consideration. i will therefore not go further into this topic, except to note that formulating monetary policy strategy and the definition and specification of its policy will be one of the first and most important issues on which the ecb must decide. the problem of intermediate targets is that we lack europe - wide empirical evidence on the stability of demand - for - money functions and on the monetary policy transmission mechanism in general. what we can say with certainty at this point - and this is not too productive - is that the analysis of the monetary policy transmission mechanism will be a truly challenging task. the financial market and structural changes produced by the single currency, as well as the general continuous structural changes in the financial markets due to globalization, are transforming the transmission processes. all the central banks carefully distill vast amounts of data and examine many different indicators before they decide on policy. thus, quantitative targets are not perhaps so important for the internal decision - making process of the central bank. but they are very important for communication with the markets and the public. how useful they are for this purpose depends very much on their predictability. 4. the fourth building block - which partly covers the previous one - is the wider overall openness of the central bank towards the markets, the public and policy - makers, not only in its strategy and targeting but also in its analyses and reasoning behind its decisions. a high degree of market transparency is natural for any central bank operating in a market environment, because transparency essentially increases the efficiency of monetary policy. without doubt,

account which was achieved as early as 1994, but also in the capital account by removing one of the three constraints of the impossible trinity : the fixed exchange rate. 11. once the flexible exchange rate regime was put in place, the next step was the development of the forex market. it was not smooth in the beginning. the market participants were as hesitant as a bird that had been released from its cage after an age and often reluctant in offering two way quotes. besides, they also probably did not have as much regulatory freedom as a market - maker would require. in 1994, an expert group ( sodhani committee ) went into this issue in great depth and detail and came out with a large number of recommendations, a majority of which was implemented. implementation of these recommendations gave the banks as well as business firms a great deal of freedom to conduct their forex business in an efficient and cost - effective manner. the ones that were not considered immediately have either been implemented over the years ( e. g. forex clearing, offshore banking units, etc ) or have become superfluous ( e. g. authorised dealer license to dfis ). 12. the two decades of flexible exchange rate regime has been marked by several episodes of disturbances emanating from external sources. the asian crisis of 1997, the post - pokhran ii sanctions, the unprecedented capital inflows of 2007 – 08, the post lehman seizure of 2009, the euro - zone crisis, the us debt problem and the so called taper - fear have all affected the exchange rate and elicited, amongst others, response that constrained the market and market participants at least temporarily. you will also notice that we are relatively more affected by external turbulence now - a - days as compared to the past, which is quite intuitive in view of the increasing openness of our external sector in trade as well as financial channels. the future course of market development has to recognise this fact and develop an immune system, as it were, to deal with the onslaught and the fortitude not to fall off the cliff every time there is heightened volatility in the exchange rate. some reflections 13. the foreign exchange market today is fairly well developed. the liquidity as gauged in terms of turnover and bid - ask spread is quite impressive. there is a wide range of products available for firms engaged in international trade and commerce to hedge their foreign currency risks. there is both an otc as well an exchange - traded segment.