second one - - it was all lost in the ensuing recession. this time around we must make sure we have a much longer expansion, reducing the likelihood and severity of any future slowdown as much as possible. i do not know how that will be possible, but the surest way of ameliorating the business cycle in this way is to avoid the imbalances occurring during the later stages of the expansion. the main imbalance in australia, as elsewhere, has always been the emergence of inflation. the story is never exactly the same - - inflation can be accompanied by a wage push, an asset price boom or an external imbalance - - but the result has been the same following each of the past three booms. that is why we need to have a more medium - term focus in our monetary policy and why the inflation target is such a central part of it. the inflation target is not anti - growth ; low inflation is not an end in itself, we are interested in sustaining a good inflation performance because we are interested in growth and employment. keeping inflation in check is the key to longer expansions. it has sometimes been said that we are too cautious in following this policy. i think that is a little unfair. of course, we are cautious in that we like to look at a range of information and think carefully before we make a move on monetary policy. but we try to be forward looking and pre - emptive. for example, we did not wait till measured inflation was below 2 per cent before easing - - in fact, it was 3. 1 per cent when we first eased in july last year. similarly, there have been suggestions that the reserve bank has a speed limit above which the economy cannot be allowed to grow ( the figure usually cited was 3½ per cent ). such a suggestion is, of course, incorrect and i have pointed this out on several occasions. in case there is still any doubt, you only have to look at our behaviour in 1997. as i said earlier, the economy has been growing at 4 per cent per annum so far in 1997, yet it did not stop us easing monetary policy twice this year. if we are getting reasonable news on inflation and our inflation forecasts are in good shape, we have no objection to the economy growing by 4 per cent or 4 per cent plus. when looking at the whole picture of employment and unemployment, monetary policy is only a small part of the story, and it mainly concerns the cyclical

, their main effect seems to have been to hose down some overheated asset markets slightly, and hence to reduce the likelihood of an imminent tightening of us monetary policy. such a tightening in the next six months cannot be ruled out, however. europe is finally recording some gains after years of disappointingly slow recovery from the early 1990s recession. in fact, european growth has picked up to the point where six european central banks recently tightened monetary policy slightly to head off possible inflationary pressures down the track. so far, i have talked about asian and world economic events as though their only effect on australia was via our exports. of course, that is only part of the story. the other important part is that we now have to face the possibility of further financial market instability. for better or for worse, through knowledge or through fear, the international investment community is taking a more sceptical look at things asian, and that includes all countries in the asian region, including australia. that means they have become more risk - averse, and more likely to judge countries and their policies harshly. we have already seen some of the effects on some asian countries : • falling exchange rates ; • falling share prices ; • rising risk margins in interest rates ; • downgrades by rating agencies. we are in a better position to handle this financial instability than we have been at any stage in the last 30 years. we formerly had a reputation as a boom - bust economy, and investors used to build in quite a large premium for risk when holding australian assets. we have come a long way in convincing investors that this is largely a thing of the past. a good example of this is that our bond yields are now virtually the same as us bond yields, whereas five years or ten years ago it was not uncommon for the gap to be as high as five percentage points ; some of this was a risk premium and some of it reflected our higher inflation. another example is that the australian dollar used to be one of the most volatile currencies in the world, whereas in the 1990s it has been no more volatile than the major currencies such as the us dollar, the yen or the deutsche mark. over the past four or five months, this has served us well. while the australian dollar has gone down a fair amount against the us dollar, it remained relatively steady in trade - weighted terms. it is true that over the last fortnight the australian dollar has declined in trade - weighted terms, but it has