wto, china has seized the historical opportunity of international industrial relocation and improved productivity and economic strengths. nevertheless, the economy has problems such as large bop surplus, rapid growth of foreign reserves, oversupply of liquidity, inflation and heightened pressures from asset bubbles. meanwhile, growing magnitude of capital flows has posed challenges to the independence and flexibility of monetary policies. given the impossible trinity of achieving monetary policy independence, fixed exchange rate and free capital flow in an open economy, a managed floating exchange rate regime will help enhance the proactiveness and capability of macroeconomic management and the effectiveness of monetary policy, curb inflation and asset bubbles and contain the macroeconomic risks. 3. a rigid exchange rate regime is not responsive to crisis and may even trigger monetary and financial crises. according to international experiences, prolonged bop imbalances and peg to a single currency by a medium - or large - sized economy can hardly sustain, and may increase its vulnerabilities to crises. a rigid exchange rate has been an important contributing factor to the mexican financial crisis in 1994, asian financial crisis in 1997, brazilian financial crisis in 1999 and argentine financial crisis in 2001. not much harm will be done to a small country if it links its currency with that of a large one, but this is hardly the case for large countries as they have larger interaction with global economy. in addition, a fixed exchange rate is an easy excuse for trade friction and protectionism. thus, it is necessary for large countries to have flexible exchange rate policy. china has adopted and will continue to improve the managed floating exchange rate regime. while furthering the exchange rate regime reform provides a great deal of potential for future benefits, efforts would also be needed to minimize possible negative impacts. these measures help maintain a facilitating environment for free trade, achieve long - term cooperation and common development, facilitate china ’ s economic development at the juncture of strategic importance and foster a favorable international economic and trade environment. on june 19, 2010, the pbc announced to further reform the rmb exchange rate regime based on measures taken in 2005. according to the announcement, continued emphasis will be placed to reflecting market supply and demand with reference to a basket of currencies and the exchange rate floating bands will remain the same as previously announced in the inter - bank foreign exchange market. this is an important move in reforming the managed floating exchange rate regime and will help maintain rmb exchange rate basically stable at an adaptive and equilibrium level, promote a balanced bop account and financial market

way, which is not supported in either economic theory or practical experience. it can also be noted that this argument was not put forward during the period when inflation was low – that is, that the riksbank would then have needed to raise the interest rate in order to raise household interest costs and ultimately inflation. temporary break from the low - inflation environment rather than lasting change? before continuing, i would like to stress that, although much has happened in a short space of time, this does not change the conclusion in my speech a year ago – that fiscal policy and monetary policy need to interact in a better way than has been the case in recent decades. my reasoning then was based on the fact that the policy rate had for a long time been at, or very close to, its effective lower bound – a bound below which it is not possible to reduce the rate further or where the negative side - effects of doing so risk being very large. this development was due to the fact that the global real equilibrium interest rate had fallen for a couple of decades to a historically low level. this interest rate cannot be influenced by the central banks, but neither can it be ignored when setting policy rates – this is so as it is the distance between the policy rate and this normal interest rate that determines how expansionary or restrictive monetary policy is. as the real interest rate has fallen, the policy rate has had to be cut to ever - lower levels for each business cycle. when the policy rate has hit the lower bound, there are limited possibilities to use monetary policy to influence demand and inflation, and my point was that fiscal policy therefore needs to take on a more active role. the situation now is different, at least for the moment. inflation is high and the lower bound for the policy rate is no longer a restriction on monetary policy. however, there may be other complications where fiscal policy can contribute to a better economic outcome. i shall return to this. it is also important to point out here that it is doubtful whether the global economic playing field has been substantially altered in the longer run by what has happened over the past year. in particular, it is difficult to see that the global real 3 equilibrium rate would have been significantly affected. according to most estimates, it is expected to remain at a historically low level for the foreseeable future. since it determines what policy rates the central banks can set in the longer term, this means that in a few years ’ time, when we have overcome today ’ s