' fear of floating'which means the tendency for their central banks to quickly resort to raising interest rates whenever the exchange rate is in danger of falling. what the chilean finance minister called the australian model, of course, is not unique to australia, 4 but it is associated with australia in latin american and asian economic circles because of australia's success in withstanding the asian crisis. while some countries such as chile see it as a sort of role model, many asian countries have chosen a different path by running current account surpluses, building up large holdings of international reserves and resisting changes in their exchange rates. as you know, we think this is a major reason for the growing global payments imbalances, and would be happier if they followed a model closer to our own. but that is another story. the interesting issue for other economies, particularly emerging market economies, is how do you reach the situation where you can borrow abroad in your own currency, or, to put it differently, where investors in other countries will willingly hold assets denominated in your own currency. when we look back and see how australia reached this position, it is a very interesting ( and reasonably recent ) story. the major step occurred when the government decided that it would borrow honestly from its own citizens. that is, it would stop using captive arrangements that force financial institutions to take government paper, and stop setting the interest rate on its own paper. in our case this occurred when we introduced the tender system for selling treasury notes in 1979 and bonds in 1982, and soon after made clear that the government would no longer borrow from the reserve bank, but instead borrow from the public to finance the budget deficit dollar for dollar. at first we had to accept very high interest rates, but in time demand for government paper expanded, and most importantly overseas investors began to find australian government bonds denominated in australian dollars an attractive investment. it was not necessary to ask them to invest, nor to do'road shows'on wall street to entice them. at the canada and new zealand also have the characteristics listed when describing the australian model. for a discussion of the difference between australia and some other commodity exporters, see : barry eichengreen and ricardo hausmann ( 1999 ), “ exchange rates and financial fragility, ” in federal reserve bank of kansas city, new challenges for monetary policy, pp329 – 368 ; and ricardo j. caballero, kevin cowan and jonathan kearns (

not been needed. that is all i wish to say about oil prices, other than to add the caveat that i am only talking about the increases to date. obviously, if we enter a new round of similar increases, the situation would have to be reassessed. world interest rates it is well known that the world has recently gone through a phase of exceptionally low interest rates, but i am not sure that people appreciate how low they were by historical standards. in fact it is not much of an exaggeration to say that interest rates in mid 2003 were at their lowest level for a century. this was the time when official overnight rates – the ones set by central banks – were 1 per cent in the united states, 2 per cent in the euro area, and zero in japan. the only qualifications i have to make to my earlier generalisation is to concede that rates may have been slightly lower during the second world war in some countries such as the united states and united kingdom when quantity rationing was the norm, but they have not been lower in peace time. we can construct an indicator of world interest rates for a century or more using a weighted average of the rates for the united states, united kingdom, germany and japan. graph 1 shows the results for official overnight interest rates or their nearest equivalent since 1860. although the graph is dominated by the high interest rates during the great inflation of the 1970s, the readings for 2002 and 2003 are lower than any other time in this long span of years. 1 part of the explanation is that inflation was low, but it was only low compared to the post - war standard – it was not low compared to most of the period covered by the graph. in fact if we construct simple measures of real interest rates ( based on realised inflation rates ), they were also low by the standards of earlier low inflation periods. 2 in table 1, real interest rates in the first five years of this decade are lower than in any previous decade apart from those containing the two world wars and the 1970s. graph 1 the observation for 1923, the year of the weimar inflation in germany, had to be deleted because it did not fit on the scale. the problem with most measures of real interest rates is that they become negative during periods of unanticipated rises in inflation such as the 1970s. for this reason, meaningful comparisons of real interest rates ( using realised inflation rates ) should only be made for periods of low and stable inflation such as the present.