to measure “ equilibrium ” flows of capital from one country to another, it is equally difficult to define meaningfully “ fundamental equilibrium ” exchange rates. as alan greenspan has pointed out, current account deficits and surpluses are now the norm rather than the exception. 4 moreover, even if a country is not today running a current account deficit or surplus, past flows of capital mean that domestic residents have assets and liabilities in a wide range of overseas countries. countries now have asset positions quite distinct from their official reserves. the single most important difference between the old world and today's world is that in the former the financial position of a country was captured by the size of its current account surplus or deficit ; now the financial position is best measured by the size and composition of its national balance sheet. the ratio of the sum of overseas assets and liabilities to gdp for major industrialised countries rose from around 70 % in 1983 to around 250 % in 2003. 5 the willingness to hold those assets and liabilities depends on expectations of the economic “ fundamentals ” such as productivity growth and demographic change. it also depends on expectations of future economic policy – both at home and abroad. if any of those expectations change, desired international investment positions will alter, possibly leading to sharp movements in asset prices and capital flows. news about economic fundamentals and about economic policy decisions leads to fluctuations in world inflation, output and employment. to understand the transmission mechanism requires a study of national balance sheets. they tell us three things. first, they tell us about the claims of one country on another. that will help to reveal how international capital flows respond to news. for example, as expectations about productivity growth in the united states have changed, so have the composition of capital inflows. equity inflows into the united states were twice as large as debt inflows in 2000. by 2004, debt flows were nearly four times as large as equity inflows. second, balance sheets contain information about the potential speed of any likely adjustment. that speed is crucial in determining the intensity of the resulting changes in capital flows and hence, the costs associated with reallocating resources. for example, currency and maturity mismatches in the banking sector created the scope for a liquidity run on korea in 1997. third, balance sheets contain information about how changes in relative prices will affect the values of both assets and liabilities. for example, both australia and the philippines were affected by the crises in thailand, indonesia and

##ness of institutions. in the broader sense, we could conclude that strengthening market discipline within a clear prudential framework can help achieve a better balance between financial system stability and economic efficiency. in that sense, as the central bank, we are very well aware of our responsibility in implementing sound and coherent policies and delivering these policies and policy related messages to the markets within the context of maximum transparency and timeliness. all these components contribute to financial security and in turn enhance the financial stability in the system, accommodating policy makers ’ further decisions. actually, financial security and stability are so much interrelated that one could easily argue that the stability is also a prerequisite for the security in the system or vice - versa. lastly, financial security and thus, stability contributes to the health of the financial systems, efficient allocation of resources and effective management and distribution of risks in the economy. maintaining and safeguarding financial stability is a must for the authorities of every country not only to have a sound national financial system but also to contribute to the overall soundness of the world financial markets. policy coordination between institutions on international and national levels will certainly be the most important aspect of this dynamic process. thank you for your attention.