quantitative easing and weak growth in the large industrialised economies is likely to lead, for a time at least, to upward pressure on other currencies and lower interest rates around the world. for the countries whose currencies are under upward pressure, this can be uncomfortable. however, it should not come as a surprise that the countries that are doing relatively well see their currencies gain value relative to those that are not doing so well. and it is this movement in exchange rates that is one of the ways in which low interest rates in the large financial centres are transmitted around the globe. clearly, the real world is considerably more complex than this. but over recent times a number of the non - crisis countries with floating currencies have indeed found themselves in this general position – that is, they have had low nominal interest rates and a relatively high exchange rate ( compared with what was expected ). this list here could include, to varying degrees, canada, south korea, switzerland, new zealand, and some of the nordic countries. in each of these cases, interest rates are very low by historical standards, and in a number of them the central bank has recently drawn attention to the upward pressure on its currency ( graph 6 ). this configuration of low interest rates and a high exchange rate is a consequence of the problems in the advanced industrialised economies. it is inevitably affecting the composition of growth in the countries concerned, although it need not be inconsistent with trend growth. industries producing traded goods and services tend to be disadvantaged relative to the nontraded parts of the economy. and low interest rates help create an environment where investors are prepared to borrow to buy assets. to some extent this is desirable, and it is one of the channels through which monetary policy works. but it can also increase the probability of imbalances developing in credit and asset markets, with potential implications for financial and macroeconomic stability. given the experience of the past decade, it is hardly surprising that the central banks in a number of countries have recently indicated that they are watching developments on this front very closely. so what are implications for australia of all of this? it is perhaps useful to make four brief points. the first is that the primary reason the australian dollar is high compared with its historical average is the large shift in the relative price of commodities i spoke about at the outset. this shift has been to australia ’ s advantage, and the high exchange rate has helped us navigate our way through a once - in - a

withdraw their funds from the bank. in the case of the repo market, lenders raised the haircuts required for the repo loans or refused to roll over the repo loans collateralized by subprime mortgage assets. this is equivalent to a partial or a complete withdrawal of funds from the market by the lenders. 13 in addition, the higher haircuts forced the owners of the assets to come up with additional cash which typically meant that they were forced to sell assets. given that there was little appetite to purchase mortgage - related assets, high - quality assets had to be sold in order to raise this cash. this put downward pressure on the prices of these assets and increased the uncertainty regarding their future values leading to demands for higher haircuts on these assets, as well. the haircut spiral, can be seen in chart 6. a fire sale dynamic developed, which depressed asset prices further leading to additional upward pressure on haircuts. the rapid deleveraging of the shadow banking system as the run progressed led to a sharp contraction in credit. we saw this earlier in chart 2 with the near complete collapse in the asset - backed security market. banks were also adversely affected by this run on securitization markets since they used these markets as well to fund many types of loans. several banks had to bring onto their balance sheets previously off - balance sheet entities that they had used to securitize loans. this used up balance - sheet capacity making it more difficult for banks to make up for the credit contraction going on outside of the banking system. the problems in the financial system spread to the real economy. when lehman brothers declared bankruptcy, a money market mutual fund – the reserve fund – “ broke the buck ”. the unanticipated losses incurred by the reserve fund expanded the bank run to the money market mutual funds. since these funds were significant investors in the commercial paper market, this transmitted the strains to the commercial paper market. dollar funding pressures were also increasing for firms operating outside the united states as their ability to access dollars through the foreign exchange markets began to become strained. the an overnight repo loan as compared with a longer term repo loan is the closest in nature to a demand deposit. see tobias adrian, christopher burke and james mcandrews. 2009. “ the federal reserve ’ s primary dealer credit facility ”. current issues in economics and finance 15, no. 4 ( august ). gary gorton. 2010. “