favourable housing market development in the nineteen - nineties, which had a positive effect on private consumption. later on, consumption has been negatively affected by political developments, which reduced consumer confidence significantly. besides, the size of the external sector and the large fdi positions make the dutch economy particularly sensitive to international developments, especially from the us. this is also reflected in the stock market - our own research indicates that the dutch stock market is traditionally highly correlated with the us stock market, in comparison to other european countries. in terms of fdi, the us is by far the most important partner of the netherlands. as a percentage of gdp, dutch investments in the us are larger than those of any other european country. hence it is no surprise that some international and us shocks have had a sizeable effect on the dutch economy, like the sharp correction in international stock markets in 2000, as well as the geopolitical tensions of the recent years. as a consequence, the dutch business cycle was more volatile and moved more closely together with the us economy than did business cycles in other countries. it is challenging now to take a look ahead. what do these observations, that i have sketched here, imply for global business cycles in the near future? will business cycles remain moderate and will co - movement remain stable? let me try to discuss some implications from my remarks so far. one implication to take note of, is related to the vulnerability of economies to international shocks. several studies have concluded that business cycles have moderated, because the amount and size of shocks have diminished. however, this might not continue indefinitely - we may run out of luck. major international shocks could occur again, significantly enhancing international business cycle volatility and co - movement. in fact, we have recently experienced that terrorism and geopolitical tensions may act as a shock to the economy, for example through global shocks in confidence levels or through disruptions of energy supply. an obvious result could be a disruptive shock to oil prices. in this respect, the results of a recent study on oil price shocks are striking. it found that an oil price shock that is related to political factors and supply side conditions has more severe implications than other types of oil price shocks, such as shocks related to demand conditions. since 1984, an oil price shock of this type has not occurred, except in the past half year. were such a large international shock to materialize, one should be aware that the partial consequences for the exposed countries can be larger

bear only if investors have information that is sufficient in quantity, reliability and timeliness. as my colleague susan phillips has said : “ well - managed firms can benefit if better disclosure enables them to obtain funds at risk premiums that accurately reflect lower risk profiles. inadequate financial disclosures, on the other hand, could penalize well - managed firms, or even countries, if market participants do not trust their ability to assess firms ’ or countries ’ fundamental financial strength. ” i indicated that historical experience teaches that volatile short - term capital flows, particularly those involving banks, are often at the heart of banking crises. a third policy challenge, therefore, is how to minimize the impact of these flows without attempting to limit them altogether, which is neither beneficial nor feasible. one approach advocated by many is the so - called chilean model. this includes a system in which firms and banks that borrow funds from abroad maintain a non - interest - bearing cash reserve at the central bank for one year. the one - year term of the reserve deposit makes the requirement most onerous for short - term positions, which is of course the intent. proponents argue that these controls encourage longer - term, more stable investments. however, there are downsides. over time, controls can, and almost certainly will, be circumvented, which might encourage even more controls. also controls, if successful, tend to perpetuate or create distortions and inefficiencies - including the protection of weak and poorly managed domestic financial institutions. on balance, even recognizing these potential problems, i believe that short - term capital controls may be appropriate, if they are a temporary part of an orderly entry by a small country into the global capital market. all of the above initiatives and approaches are aimed at avoiding an insolvent banking system. nevertheless, since we know that banking accidents will happen in the global market place, what is the best solution for countries that face an insolvent banking system? the best solution to emerge from these crises and significant banking problems appears to be to remove the nonperforming loans from the bank system, even if only through government ( or quasi - governmental ) purchases, and then resell them to private market participants at the best prices available. to the extent that the government is involved, a number of questions arise. first, should nonperforming loans be purchased at par to help recapitalize banks? this approach has been followed in some countries, but providing such a subsidy to