resulting from the three basic equations in which the money stock does not appear – in particular from the gap between the natural and actual rates of interest. for this result to go through, the money stock cannot per se be among the variables that determine the equilibrium of the remaining – the nonmonetary – part of the model. this means that the separation result is not possible if there is a real balance effect operating in the goods markets. or to put the result differently, the separation feature is consistent with an inside money monetary system, while it may well not be consistent with an outside money structure. it is thus consistent with the suggestion by harry johnson mentioned above, that monetary analysis might better be carried out primarily in an inside - money than an outsidemoney model. this neo - wicksellian result is somewhat surprising. it provides justification for the behavior of those central banks that think and talk of monetary policy purely in terms of the policy interest rate and other financial return variables, but not of the money stock. however, we need to remind ourselves that it is built on an assumption that the money stock per se does not appear in the basic three - equation model – and that is an assumption, not a theorem. 13 4. the goals of policy. when he turns to optimal policy, woodford starts chapter 6 by asking what the goals of monetary policy should be. he states that there is a fair amount of consensus in the literature that a desirable monetary policy is one that achieves a low expected value of an objective function that includes inflation and bis central bankers ’ speeches “ some measure of output relative to potential. ” he then goes on to point out the many questions such a formulation leaves unanswered, including whether to target the price level or the inflation rate, should greater priority be given to reducing the variability of unforecastable inflation, should one seek to stabilize output deviations from a smooth trend or from the short - run aggregate supply curve, and so forth? and then the surprising comment ( p. 382 ) the aim of the present chapter is to show how economic analysis can be brought to bear upon these questions. this sounds simple but it is not, for the explanation that woodford provides is that we have seen that models founded on individual optimization can be constructed that, thanks to the presence of nominal rigidities, allow for realistic effects of monetary policy upon real variables. here we shall see those same nominal rigidities provide welfare - economic justification for central bankers ’

inflation has been in double digits. what are the reasons for such a development? what is the outlook for inflation at end of the second quarter? during the first quarter of 2007, containing inflation pressures was a challenge. inflation rose to 12. 7 % in march 2007, reflecting both higher food and non - food inflation. higher food inflation was explained by increased cost of most fresh vegetables, typical during this period. the other contributing factor was a rise in the price of beef, following the ban on transportation of cattle from southern province, a major supplier, to curb the spread of the cattle disease, contagious bovine pleural pneumonia ( cbpp ). higher non - food inflation was due to increased household energy and transportation costs, following upward adjustments in prices of petrol and diesel in january 2007. during the second quarter of 2007, however, inflation is expected to slow down due largely to improved food supply. already in april, inflation slowed down to 12. 4 % from 12. 7 % in march. what is your assessment of the recent developments in commercial banks lending interest rates? in line with lower inflation and yields on government securities, commercial banks nominal average lending rate declined to around 28 % in december 2006 from about 34 % in december 2005. more recently, in april 2007, it declined further to 24 %. how would you describe the recent performance of the external sector? the external sector has continued to score remarkable improvement, as reflected in the overall balance of payments surplus of us $ 696 million in 2006 compared to a deficit of us $ 284 million in 2005. furthermore, the preliminary assessment is that the current account deficit as a percentage of gdp ( excluding grants ) reduced to 1. 1 % from 11. 5 % in 2005. this improvement has been due to increased export receipts arising from record high copper prices and increased export volumes. in addition, the historic debt relief under the heavily indebted poor countries ( hipc ) initiative and multilateral debt relief initiative ( mdri ), as well as the increased budget support from our cooperating partners, further strengthened the external position. preliminary information indicates that the country ’ s external debt position of us $ 7. 1 billion as at end - 2004 fell to us $ 600 million at enddecember 2006. the foreign exchange market, in 2006, was characterised by a general depreciation of the kwacha against major currencies. in order to moderate exchange rate volatility, the bank implemented a number of measures