fundamentals could not reliably out - predict the naive alternative of a “ no - change ” forecast for year - to - year changes in major - industrial - country exchange rates. some more recent models can out - predict a “ no - change ” forecast ( for example, macdonald and taylor 1993 ) but the basic empirical fact remains largely intact. no - one has yet been able to uncover macroeconomic fundamentals that explain more than a modest fraction of year - to - year changes in industrial - country floating exchange rates. frankel and rose ( 1995, p 1707 ) summarise the dismal state of exchange rate empirical research : “ … the case for macroeconomic determinants of exchange rates is in a sorry state. with the exception of some significance in bits of statistical innovation and announcements at very short horizons, and some hazy predictive power at long horizons, there is little support for standard macroeconomic models ”. flood and rose ( 1999 ) find that the switch to a floating rate produces much more variability, even if the fundamentals are no more variable : “ the policy switch between fixed and flexible exchange rates entails an essential shift in market structure across regimes … expectations are policy - dependent. ” ( p f668 ). it is not the purpose of this paper to address the issue of stability among the g3 currencies, but it might be noted that greater stability would clearly have been very helpful for the other countries. when the yen moved from 80 yen per dollar in april 1995 to almost 150 in the middle of 1998, this was clearly quite disruptive for countries with liabilities denominated in either dollar or yen. a case can be made that a trigger or catalyst for some of the crisis has, in fact, been movements in foreign exchange rates or interest rates - with the tightening of us interest rates in early 1994 being a factor in mexico, and the depreciation of the yen after april 1995 being a factor in causing yen - denominated borrowers to focus on their yen - carry borrowing strategies. than fixed - rate countries ( ie they were not, in fact, able to direct monetary policy to the needs of the domestic economy, but had to use it to defend their exchange rates ). but the main problem faced by emerging countries which chose a free float is how the rate would behave in the face of the large and volatile capital flows which these countries experienced in the 1990s. in due course, these flows seem likely to resume for many

the establishing of a cooperation with other european central banks. the implementation of these and similar projects by the ecb and the eu in recent years, unequivocally confirms their continued determination, commitment and dedication to assist the central banks of the western balkan countries on their way to joining the escb, and later the euro system. on the other hand, the realization of such projects enables strengthening of the cooperation between the central banks of the region and the central banks of the eu, which is inevitable in the process of integrating the entire region in the eu. let me finally thank the ecb and the eu for enabling the nbrm to participate in this project. i wish success for all the institutions involved in the project in anticipation of even greater cooperation and i thank our hosts for organizing this event. bis central bankers ’ speeches