, g8 and the world economic forum. despite these demonstrations, global economic integration today is far greater than it has ever been and is likely to become even stronger in the coming years. 2. the impact of globalisation on south africa the re - entry of south africa into the globalised financial markets and the opening up to international competition led to a sharp increase in the participation by non - residents in the domestic financial markets. non - residents are now responsible for about one - third of the turnover on the jse securities exchange sa and approximately one - eighth of the volumes on the south african bond exchange. this has caused share and bond prices, as well as the exchange rate of the rand to be increasingly influenced by developments in the rest of the world – particularly in emerging markets. these transactions by non - residents contributed materially to substantial increases in financial sector activity. turnover on the south african bond exchange, for example, increased from r2, 0 trillion in 1995 to r12, 4 trillion in 2001, while the total value of shares traded on the stock exchange rose from r63 billion to r606 billion over the same period. in the foreign exchange market volumes increased from a net average daily turnover of us $ 2, 7 billion in 1995 to us $ 9, 6 billion in 2001. market activity was still fairly brisk in november and december last year, with the net average daily turnover averaging us $ 8 billion. integration into the world financial markets required a major restructuring of the institutional arrangements in the south african capital markets. the jse securities exchange sa introduced reforms to provide for corporate ownership, foreign ownership of stockbrokers, dual capacity trading, negotiated commissions, and electronic screen trading. the securities exchange is continuing to improve its facilities by providing for the immobilisation and dematerialisation of shares, and for improved clearing and settlement arrangements. these changes and the substantial increase in portfolio investments and trade finance by nonresidents contributed to a large inflow of capital but also resulted in greater volatility in the capital movements between south africa and the rest of the world. a nearly consistent net outflow of capital of r48, 3 billion in the period from 1984 to the middle of 1994 was turned around to a net inflow of capital of r61, 3 billion from 1995 to 2000. however, this inflow of capital fluctuated sharply from r16, 6 billion in 1995 to r3, 0 billion in 1996, r21, 3 billion in 1997

have high rates of inflation which are out of line with the rest of the world, disruptive capital flows could occur because of fears of currency misalignments. the closer integration of the world economy has therefore focused the ultimate objective of monetary policy and made it even more important to attain this objective. it should, however, also be realised that such a policy stance does not provide unconditional protection against speculative capital outflows. external economic shocks or perceived poor policy measures can still trigger a reversal in capital movements. monetary policy cannot prevent these reversals. international investors make their decisions on the basis of a wide variety of developments, including price stability. the best approach that central banks can follow is to pursue financial stability in a transparent and accountable manner so that they can at least forestall any uncertainties in this regard. although the objective of monetary policy has been better focussed within the context of globalisation, the integrated world economy has resulted in a more complex mechanism for transmitting monetary policy. the relationship between changes in interest rates, money supply and inflation has become less clear under these new conditions, compared with the period when south africa was more isolated from external influences. as a result of large international capital flows, the effects of policy changes are being transmitted to a greater extent through critical indicators such as bond yields and exchange rates. these changes in the transmission mechanism of monetary policy have reduced the credibility of the money supply as an intermediate guideline for policy. the integration of financial markets and financial innovations made the demand - for - money function less stable. this was clearly reflected in a consistent decline in the income velocity of circulation of m3 of about 13 per cent from 1994 to 2000. the income velocity of circulation of m3 continued to decline strongly in the first three quarters of 2001. the money supply accordingly became a less reliable anchor for monetary policy. volatile capital movements further complicate the transmission mechanism under floating exchange rates, because of the impact that exchange rate changes have on the foreign transactions of a country. in a closed economy, the transmission mechanism runs from increases in the repo rate and other short - term interest rates through to longer - term interest rates and asset prices and then to aggregate demand and prices. the open economy version of the transmission mechanism under floating exchange rates runs from interest rates, to nominal exchange rates, to the absolute and relative prices of tradeable goods and eventually to the prices of non - tradeable goods. in view of this more complicated transmission mechanism in a reintegrated global