by the sudden uncovering of problems. following the g - 7 halifax summit in 1995, a series of international initiatives to improve the functioning of financial markets have been undertaken, mainly under the auspices of the international monetary fund and the bank for international settlements. these initiatives seek to enhance the transparency and disclosure of economic and financial data, strengthen the surveillance of national and global financial systems, develop mechanisms for support in times of crisis, and provide training in financial sector supervision. recognizing the importance of these efforts, canada has recently proposed the creation of a new international process to provide “ peer review ” of national financial regulatory and supervisory systems. efficient and prudently managed national financial systems can reduce the risks, and maximize the benefits, of international capital flows. in this regard, national supervisory authorities need to ensure that financial institutions have appropriate risk - management systems in place to help minimize risks, particularly with respect to mismatching of maturities and currencies. this would make it easier to cope in the event that short - term inflows switched to outflows. one of the main problems in asia was that domestic financial institutions were borrowing short - term, in foreign currency, to invest in illiquid domestic assets. concluding thoughts to summarize, globalization has been broadly beneficial to the world economy. international financial markets have facilitated access by borrowers to a larger pool of global savings and have enhanced investment opportunities for savers worldwide. yes, international capital flows have at times disrupted national financial markets. but such episodes more often than not were caused by unsustainable domestic policies and pointed to the need for adjustment. in view of the overall benefits of greater access to global capital markets, it would not serve us well to restrict the free flow of funds. the best way to maximize the benefits of financial globalization and reduce the risks of disruptions to national macroeconomic policies is to ensure that these policies are sound and sustainable. in addition, financial systems need to be prudently managed and supervised - both nationally and internationally. here in canada, we are following this advice in our domestic macroeconomic policies. and we are also strongly supporting and contributing to global initiatives designed to promote financial market stability worldwide.

are presumed to be desirable and based on fundamentals. but short - term flows are by no means all undesirable and destabilizing. and there is no way of discriminating between useful flows and destabilizing speculative ones. for example, because foreign trade and investment inflows and outflows are not always fully offsetting, short - term capital flows are typically needed to balance out a country ’ s external accounts. these capital flows occur in response to actual and anticipated movements in the exchange rate, and thus serve to smooth out exchange rate fluctuations. because such flows are often driven by small differences in perceived rates of return at home and abroad, they could well be discouraged by a transactions tax. on the other hand, speculative flows that actually “ bet ” on a sharp movement in a currency, have rather large expected returns and are unlikely to be discouraged by the tax. in the end, a transactions tax would likely increase, rather than decrease, exchange rate volatility, as well as reduce market liquidity and raise the cost of capital. needless to say, where financial market fluctuations reflect changes in domestic macroeconomic policies that put investors at greater risk than before, the tax would be aimed at treating the symptoms rather than the cause of the problem. in all, i find the case for a tax on currency transactions completely unconvincing. promoting greater financial market stability if a tax is not a good idea, how else can we promote greater stability in international financial markets and reduce potential disruptions to domestic policymaking? i have already talked about the value of a flexible exchange rate system in facilitating adjustment to “ real ” shocks and allowing national authorities to pursue an independent monetary policy. flexible exchange rates can also be helpful in moderating the size of, and aiding in the adjustment to, capital flows. in addition, governments are increasingly coming to the realization that the issue of international financial stability is best addressed not by retreating into isolation or by falling back on distorting, costly restrictions, but rather through sound and transparent domestic economic policies. international co - operation can also help. it can help by encouraging countries to pursue national policies that lead to economic stability, thereby reducing the risk of sudden changes in market sentiment and sharp exchange rate fluctuations. and it can help by setting widely accepted standards for transparency and disclosure. such standards should support more informed market judgments about the riskiness of investments, especially in emerging market economies, and thus help avoid the crises that can be triggered