financial sector will be much larger than the cost to the public of bailing out ailing financial institutions. we also now know that these policy interventions have had mixed results in stemming the crisis. the main lesson to be learned from the financial crisis is that in the highly globalised financial markets, effective regulation is an indispensable tool to manage financial markets. it has been proven, on various occasions that the market is not always efficient. we must therefore except that there will always be occasions where the market will fail and when that happens there is a realistic expectation that governments should intervene. when markets are functioning as expected, proponents of minimal regulation generally consider regulation as an unnecessary constraint to the private sector. my view is that we need to be pragmatic and not wait until markets fail before governments intervene by having effective market regulation. let me also hasten to add that when governments do intervene to correct market failures, such intervention must be temporary and targeted. our financial system has been relatively shielded from the immediate negative consequences of the financial crisis. overall, therefore, there is no immediate concern about our financial stability. however, depending on how long the crisis may last, we are not altogether immuned from the long - term effects, such as slow economic growth. moreover, although inflationary pressures have started to abate, the outlook remains uncertain. it is, thus, imperative to manage our resources prudently, both at a national and household levels. it goes without saying that the financial crisis has created a challenge for monetary policy. a number of monetary authorities are faced with the difficult balance between maintaining price stability by tightening monetary policy without needlessly jeopardising economic growth. principles of monetary policy framework let me now return to my topic of discussion today, namely our monetary policy framework. before elaborating on the specifics of our monetary policy framework, i would like to highlight some principle issues that guide monetary policy frameworks world - wide. monetary policy has been acknowledged as one of the main tools that central banks and governments use for economic management. one can describe monetary policy as the action by the central bank to influence short - term interest rates, money supply and credit extension to achieve certain objectives. in many countries, including namibia, the objective of monetary policy is price stability. in an environment of stable prices, economic actors, both domestic and foreign, are able to plan better for the future. for instance, both domestic and foreign investors would be hesitant to invest in a high inflation

dollar funding premia for non - u. s. banks increase. having said this, i should note that the recent increases in the u. s. dollar funding premia in the fx swap market are occurring without any obvious problems regarding banks'creditworthiness ( chart 4 ). this should imply that the mechanism for current increases in the dollar funding premia is different from that of past stress periods. let me delve a little more into this issue. consequences of monetary policy divergence and regulatory reforms with the low interest rate environment persisting in japan and europe, the united states initiated " tapering " and entered a rate increase cycle. such a divergence in monetary policy outlook influences the return - seeking behavior of financial institutions and investors. against the background of monetary policy divergence between japan and europe on the one hand and the united states on the other, the nominal return on u. s. dollar assets is now higher than the return on yen or euro assets, and financial institutions and investors in japan and in europe are increasing their investments in dollar assets ( chart 5 ). when banks invest in foreign currency denominated assets, they generally hedge foreign exchange risk in view of the high capital charges for such risk. such fx - hedged investments in dollar assets are economically equivalent to transactions that purchase dollar assets with dollars obtained through fx swaps with yen or euros as collateral. investments in foreign currency bonds by life insurers are less likely to be hedged compared with banks'investments, but slightly less than 70 percent of investments by japanese life insurers seem to be hedged in recent years. the pattern of behavior suggests that recent monetary policy divergence is encouraging japanese and european financial institutions to invest in dollar financial assets and contributing to tighter market conditions in the fx swap market. meanwhile, this is not the first time that we have experienced monetary policy divergence between japan and the united states. for example, monetary policies also diverged in the middle of the 2000s, with the bank of japan continuing its quantitative easing while the federal reserve gradually raised its policy rate, and during this period, japanese financial institutions increased their purchases of u. s. treasury paper and agency securities. the u. s. dollar funding premia, however, did not visibly increase during this period ; i. e., broadly speaking, covered interest rate parity held ( chart 4 ). one has to wonder why, in the fx swap market, reactions to monetary policy divergence between japan and the united