##fold, and be ready to respond flexibly. i am optimistic that central banks can adapt to changing economic conditions, as they have done so over many years. the changing role of the imf structural changes are not confined to the real economy. the forces of globalization are influencing the international monetary system as well. yesterday, at the meeting of the imf council, we discussed the results of the strategic review of the imf, initiated by managing director, rodrigo de rato. rodrigo's project was extremely helpful, drawing up a comprehensive list of issues that we have to address. the consensus on where we stand was already described by gordon brown yesterday, and i will not repeat it here. the strategic review was necessary and useful in defining what needs to be done today. it is, however, the first step. sixty years ago, the fund was created to maintain a network of exchange rates anchored on the u. s. dollar backed by gold. there was also a mechanism to facilitate adjustments. member countries were obliged to enter into annual consultations. in this process, the fund identified economic policies that would undermine the network of fixed exchange rates. the fund then suggested remedies, and lent money if necessary to buy time for policy adjustments to take effect. if exchange rates really fell out of line with economic fundamentals, it was possible to tweak the rates. fast - forward to today, and we no longer have fixed exchange rates, particularly between systemically important countries. as a result, policy advice from the fund is losing the force and urgency it once had. at the same time, we are witnessing increasingly stronger and more mobile private capital flows. these flows are, of course, generally beneficial. though it is hard to measure precisely, private capital has played a significant role in the robust investment - led growth of many countries. private flows are not only getting bigger, they are getting more nimble. in the seventies and eighties, banks were the main financiers for emerging market economies. on the other hand, much of today's private capital flows are in the form of bond issues. compared with banks, bondholders tend to react very quickly. bankers cannot call a loan until it is due. on the other hand, when bondholders sense a problem brewing, they can sell their bonds immediately. if everyone heads for the exit at once, bond prices will collapse and exacerbate problems for the issuing country. there will also be coordination problems. you can

the private sector which has been borrowing heavily from overseas, not the public sector. and while some of this borrowing has been done by the corporate sector directly, much of it has been done by the banking sector. comparable levels of overseas borrowing by banks in other countries have been sufficient to make foreign lenders very nervous ( for example, in some asian countries in recent years ), and yet similar nervousness has not been at all evident in new zealand. why? i can only conclude that the foreign lenders take considerable comfort from the fact that most of the banks operating in new zealand now are in fact wholly - owned by foreign banks, or are indeed branches of foreign banks. those parents are seen as being financially strong, and fully able to back the operations of their new zealand subsidiaries or branches. ( it may also be relevant that, overwhelmingly, the overseas borrowing being undertaken by new zealand banks carries no foreign exchange risk for the banks themselves. ) in some countries, there is political reluctance to allow foreign institutions unrestricted entry into local banking sectors. i would have to say that, as a country where all but one of our 17 banks are owned and controlled overseas, we have seen absolutely no disadvantages from this situation, and many advantages. we have a financially stable banking sector, with vigorously competing and highly innovative banks, all of them subject to the monetary policy influence of the central bank. i have no doubt at all that the banking sector is considerably more stable than would have been the case had all the banks been domestically - owned, whether in the private sector or in the public sector. monetary policy lessons from new zealand lesson 3 : keep prices stable the third lesson from our experience has been the crucial importance for financial system stability of keeping prices stable. i am sure that for this audience the assignment of monetary policy to the objective of keeping prices stable is not extraordinary, as evidenced by price stability being the primary objective of the single monetary policy of the eurosystem. but let me comment on the link between price stability and financial system stability. by the late eighties, new zealand had experienced nearly 20 years during which consumer price inflation had been above 10 per cent almost without a break. interest rates after adjustment for tax and inflation were often strongly negative, and there was as a consequence a strong incentive to invest in real estate and shares, using as much borrowed money as could be obtained. this was undoubtedly an important contributor to the severe difficulties which both the corporate sector and some parts of the banking sector experienced when