currency had been pegged to the au dollar, new zealand ’ s exchange rate to the rest of the world would have been higher, interest rates would have risen three times already, and our recession would probably have been deeper. the argument is even stronger for other currencies, such as the us dollar. australia and new zealand are not the same, but we are far more similar to each other than to europe or the us. if our currency had been pegged to the us dollar over the past decade, interest rates would have been lower for longer in 2003 and 2004, exacerbating the housing boom ( figure 3 ). some of the challenges of a currency union can now be seen in euro area economies such as ireland, greece and spain, where monetary policy settings have been unable to lean against unsustainable domestic booms, or against the deep recessions that followed. figure 3 policy interest rates in nz, the us, and australia source : bloomberg figure 4 gdp growth in euro area economies source : datastream singapore ’ s monetary policy regime is sometimes pointed to as an alternative to inflation targeting that has maintained stability in the currency while achieving a track record of low and stable inflation. over the past two years, of course, this has not been the case, with inflation approaching 8 percent in 2008 and prices falling in 2009. over a longer period, it does appear that singapore has generally managed to guide its exchange rate to keep inflation stable. but a range of special factors made this possible – singapore ’ s extraordinarily high trade ratio, its large stock of domestic savings and foreign exchange reserves, and a range of supplementary stabilisation instruments and capital controls. in particular, in new zealand, with its much larger non - traded sector, a singaporean regime might potentially have required greater swings in the exchange rate than we actually saw to achieve similar inflation outcomes. global policies, the tax system and financial stability also matter a lesson from this period is that while monetary policy can always achieve price stability, whether this occurs in the context of balanced growth also depends on other factors. as the housing boom has shown, these factors include global policy settings and the structure of the tax system. looking back over two years of crisis, perhaps the key lesson is that financial stability cannot be ignored when thinking about macroeconomic stability and the conduct of monetary policy. we ’ ve been reminded that financial system developments have the potential to complicate monetary policy enormously, and that stable prices do not

, but it gets exacerbated by the international capital flows, particularly when the changes in such flows happen to be unrelated to domestic fundamentals. in such a situation, managing the transition turns out to be a critical challenge for policy making, and the management requires a more difficult and dynamic trade off between commitment and flexibility in policy. overall, while added risks – both upside and downside – are inevitable with increasing global financial and economic integration, the emes may consider strengthening their resilience through not only sound macroeconomic management but also by adopting appropriate prudential measures. over a period, co - ordinated efforts, both at regional as well as global levels, could also help emes to cushion themselves better against the risks of financial globalisation. thank you. 6 / 6