involve variations in interest rates. the answer is no. interest rates have always moved up and down under all the monetary regimes that have existed, whether the regime was a gold standard, a currency board, a normal fixed exchange rate, a monetary target, an inflation target, or a regime of pure discretion by the central bank. if someone can think of an example of a successful monetary system where interest rates never had to change, i would be very interested to hear of it. but while most people can instinctively appreciate this point, there are, no doubt, some who would like to know what would be wrong with trying to hold interest rates permanently fixed, even if it has not been done before. this brings me to the second part of the answer, based on economics : a fixed interest rate policy would be unsustainable because it would inevitably lead to either an inflationary or a deflationary spiral. this conclusion is well established in the theoretical literature, but it does not require any great familiarity with monetary theory to appreciate how it is arrived at. suppose, for example, that a central bank attempted to set the interest rate at a low level which imparted a strong stimulus to demand and the technical way of describing the weakness of permanently fixing the interest rate is to say that it is an unstable rule because it leads to indeterminacy of the price level. this point has been appreciated at least as far back as henry thornton ( 1802 ) who analysed the inflationary consequences of the fixed interest rate policy then favoured by the bank of england. activity. over time, if that were maintained, it would cause inflation to rise, and, with a fixed nominal interest rate, the real interest rate would decline, thus leading to further increases in demand and inflation. this process would continue through successive rounds resulting in an inflationary spiral. by a similar logic, if the initial level of the interest rate were set too high, a self - reinforcing process in the opposite direction would ensue, culminating in a deflationary spiral and rising unemployment. only if the interest rate could be set at an exact equilibrium point would these two extremes be avoided, and, even then, the equilibrium would be temporary. any economic event that pushed the economy slightly away from its equilibrium would set off one of the two self - reinforcing processes i have just described. one response to this line of argument might be to suggest that the central bank try to stabilise the real rather than

##est countries are nearer to the equator than the richer ones. being in the tropics is thus regarded as condemning a country to relative poverty. of course, this does not have much relevance for australia because the populous two - thirds of our country is in the temperate zone. but it is also interesting to reflect on the question of why we should expect a hot climate to be associated with poverty. it certainly was not always so ; in fact it was the opposite. for example, in pre - columbian america, it was the hot areas populated by aztecs, incas and mayans that were richer than the temperate areas. in 1667, under the treaty of breda, the dutch gave up their claims on manhattan to the english in order to retain the island of run ( in what is now indonesia ). the superior value they placed on run was due to its being the world ’ s principal source of nutmeg. in the 18th century, france had only enough armed forces to protect one of its two main american possessions - canada and haiti. it chose the latter because it was more valuable, being a major producer of sugar. even in recent years, some of the success stories among developing economies have been in tropical climates - singapore, hong kong, thailand, malaysia and, until recently, indonesia. certainly, a tropical climate does not condemn a country to poverty, even if most of the world ’ s poverty is in the tropics. as i will explain later, the correlation between geography and poverty can be explained at a deeper level by institutional factors and the incentives that businesses and workers face. there is, however, a lot of evidence suggesting that to be landlocked and in the tropics is so big a disadvantage that no country has yet overcome it. sub - saharan africa is the best example of this. ( c ) the resource curse there is a widespread view that countries with abundant resources ( particularly of minerals and oil ) under - perform resource - poor countries. there is even some statistical evidence to suggest that this has happened on average over the post - war period. 1 the arguments behind this relationship are based on the belief that : • possession of resources is a windfall which makes the community less energetic in pursuing other economic activities ; • resource extraction is a low - tech / low value - added activity ; and • the price of resources inevitably falls relative to the price of manufactured goods. the first response to this thesis is to recognise that, even if true, it only