treated as matters of paramount importance. this is so because it is well recognised that financial sector and economic development in any country go hand in hand and that the collapse of the sector can have serious negative effects on both the socio - economic and political state of any country. it is therefore important that the financial sector be backed by a strong legal framework. this is even important realising the economies are susceptible to crises as experienced in the recent global financial crisis. a robust legal and regulatory structure can act as a bulwark against the backdrop of the crisis, providing clarity and confidence for market players and consumers alike. distinguished ladies and gentlemen, it is pleasing to note that from 2010 to - date, parliament has passed the following acts : • financial services act • banking act ; • reserve bank of malawi ( amendment ) act ; • microfinance act ; • insurance act • securities act • credit reference bureau act bis central bankers ’ speeches • financial cooperatives act and • pension act. of all these acts, i wish to draw your attention to the financial services act. this is an umbrella law for the financial services industry which is interlinked with all other individual sector laws cited above. it consolidates the supervisory responsibility for the whole financial sector to the reserve bank of malawi governor, as registrar of financial institutions. it also incorporates more detailed requirements for licensing of all financial institutions in order to be in tandem with current standards. therefore, as we look at sector laws, we should always be mindful of the provisions of the financial services act, which is an all encompassing law. distinguished participants ; you may recall that the process of enactment of some of these laws was not always a smooth one, often faced with objections from various stakeholders of some provisions. as such, the reserve bank of malawi is fully cognisant of the fact that the implementation of these financial services laws shall in some instances be met with resistance, thus giving rise to legal suits. it is in this regard that we believe that a seminar of this kind is very important and timely, as it will give you lawyers an opportunity to familiarise yourselves with these laws and take note of possible litigious areas. looking at the seminar programme, i am very optimistic that the objectives of this seminar will indeed be achieved. let me ask all distinguished participants to be fully involved in this seminar so that at the end of the day, we shall all benefit from the presentations and discussions that will be made. it is the belief of the reserve bank that this is

. thus, once we allow for the possibility of default by the fa, a sufficiently tough cb can have considerable control over the price level. of course, i ’ ve been arguing through examples. it would be more interesting to deliver a fuller characterization of the term “ sufficiently tough ” – but i ’ m not going to attempt to do so. instead, in what follows, i ’ ll discuss some aspects of the cb ’ s response to a particularly critical situation. suppose the fa owes $ 10 billion on a given friday. it plans to repay that loan by auctioning new debt on the preceding monday. however, when it auctions off the new debt, it finds that it can only raise $ 5 billion. the fa is now in danger of defaulting on its friday obligation of $ 10 billion. it is at this stage that the level of commitment of the cb to its chosen inflation path will be severely tested. the fa will ask the cb to take some action that will allow the fa to raise an additional $ 5 billion on wednesday. there are many possible actions. the fa might ask the cb to intervene by setting a floor on the price of debt in the wednesday auction. but there are less overt approaches. for example, the cb can commit to a price peg for the fa ’ s debt in the secondary market for that debt. in any event, if the cb does intervene in some way to ensure the fa ’ s solvency, the cb no longer can be said to have independent control over the price level. if the cb ’ s intervention was largely unanticipated by markets, expected inflation will rise after the cb ’ s intervention. then, incipient fiscal insolvency has triggered inflationary pressures. of course, markets may well have already assigned a positive probability to the possibility that the cb might intervene in this kind of scenario. if so, then past inflation was already influenced by the markets ’ expectations of this fiscal policy scenario. as modeled, for example, by eaton and gersovitz ( 1987 ). see kocherlakota ( 2011 ). here, i ’ m assuming that the cb is exchanging reserves and fa securities so as to control the path of a shortterm nominally risk - free interest rate. this nominally risk - free interest rate may not be the same as the interest rate on fa debt. atkeson, chari and kehoe ( 2010 ) and cochrane ( 2011 ) argue ( convincingly to my mind )