year, commercial banks started to raise their credit lending standards and criteria. the quarterly senior loan officer survey of the federal reserve board bears testimony to the fact that elevated loan spreads and increased deposit requirements have been self - imposed by the banks to reduce their asset risk in an effort to protect their balance sheets. although this is probably perfectly rational behaviour by prudent banks struggling to value the extent of their loan exposure, it has the unfortunate effect of reducing the effectiveness of monetary policy initiatives taken by central banks to stimulate the economy. in fact, in most advanced economies, central bank interest rate levels are currently at their lowest levels in decades, but this does not necessarily imply that this intended benefit is passed on directly through to the investor and consumer. the behaviour of commercial banks is quite understandable, given the nature and origins of the current economic situation. however, it also underlines the procyclical nature of their actions : banks are more keen to offer credit when times are good, but become somewhat reluctant to advance credit facilities during times of uncertainty and economic slowdown. this behaviour of commercial banks is not unique to the usa. the ber / ernst & young financial services index has also found evidence that domestic banks also have raised their lending standards and criteria. it also appears that domestic banks are charging higher spreads relative to prime than was previously the case. the above illustrates that we should not rely too heavily on the results of a model to guarantee our policy success, particularly during times of heightened uncertainty. no model can be expected to replicate all these factors in a consistent time - invariant framework, especially since the behavioural patterns of economic agents tend to change so radically from time to time. 4. conclusion despite all the problems with the use of models and the challenges related to forecasting in an uncertain environment, models, irrespective of how they are structured, remain integral to the policy decision taken and we will therefore continue to use them. the models themselves have become increasingly sophisticated. but this does not guarantee the success of monetary policy formulation and implementation especially, in an uncertain future. the challenges we are faced with have certainly escalated in recent times. however, with the new challenges we also have new opportunities to get a greater understanding of the dynamic and ever - changing economy we need to deal with. thank you very much. references blanchflower, d. 2009. “ macroeconomic policy responses in the uk? ”, open lecture by david blanchflower an external member of the bank of england monetary

longer - term refinancing operations ( announced in june 2014 ), would increase the size of its balance sheet by roughly 1 trillion euros to 3 trillion euros, a level last seen in early 2012. bis central bankers ’ speeches governing council will consider in the first quarter of 2015 whether to embark on a sovereign bond purchase programme. japan ’ s economic performance has also disappointed, with the hike in the value - added tax ( vat ) partly to blame. pre - emptive buying ahead of the vat increase in the first quarter of the year resulted in a positive performance, but this was followed by contractions in the second and third quarters, pushing the japanese economy back into recession. furthermore, although inflation is above the 2 percent target, this is largely due to the vat increase and inflation is expected to fall in the early months of 2015. in response to recessionary conditions and still muted inflation, the bank of japan ( boj ) responded by raising its monetary expansion programme in october by an additional ¥10 – 20 trillion to ¥80 trillion ( an equivalent of just under us $ 700 billion ) per year. clearly, we are seeing a divergence of policy in the major advanced economies. this suggests that central banks need to weigh the spill - over effects of tightening policy in the us against accommodative policies in europe and japan in determining their own monetary policy trajectories. our sense is that the impact of us tightening will dominate, but that it would be tempered somewhat by ecb and boj stimulus plans. however, it is clear that global financial conditions have become less hospitable for countries with large external financing requirements. this process has already delivered a bumpy ride for south africa, as it has for some other countries. impact of normalisation on south africa like most emerging markets, south africa benefited from the massive liquidity injection into the global financial market following the great recession. inflows of capital meant that the current account deficit was comfortably financed, while it also resulted in significant appreciation of the rand. this in turn helped to contain inflation, allowing room for accommodative monetary policy over a fairly extended period. however, these trends started to reverse in may 2013 in anticipation of us monetary policy normalisation, following indications to that effect from the fed. this saw a widespread depreciation of emerging market currencies, which intensified with the actual implementation of the us federal reserve ’ s asset purchase tapering programme starting from january 2014