monetary policy and the build - up of financial risk the interaction between monetary policy and the amount of risk in the economy is not confined to the details of the collateral framework. it extends also to the interest - rate setting itself. unfortunately, most macromodels are not well suited to analyse the relationship between monetary policy and the build - up of financial imbalances. they generally assume that monetary policy works via the impact of the short - term policy rate on long - term interest rates and the exchange rate, possibly amplified by the so - called credit channel. however, recent research has challenged the traditional wisdom by suggesting that in reality there are other channels at work which are relevant to understanding the interaction between monetary policy and financial imbalances. 10 first, it has been suggested that policy rates would be crucial in their own right. the reason is that financial institutions normally tend to maintain very low spare capacity on their balance sheets – for cost reasons – making wholesale funding the only readily available source of funds to finance at the margin an additional unit of investment. the close association of money market rates to policy rates implies that the central bank has a direct grip on the marginal price of financial institutions ’ leverage. and leverage is one of the key factors that determine the amount of risk and the extent of vulnerability present in the financial system. second, it has been suggested that monetary policy works also via the so - called “ risk - taking ” channel, whereby low levels of policy rates tend to induce excessive risk - taking by financial institutions. 11 these new insights can shed light on the effects that very expansionary monetary conditions can have on financial imbalances, fuelling in particular the build - up of maturity mismatches via excessively low interest rates. and these insights also make clear the hazard to which the central bank is constantly exposed. if a liquidity crisis occurs, the central bank may have to step in and provide abundant liquidity to preserve the functioning of the transmission mechanism and counteract risks to price stability emanating from systemic instability. anticipating this policy response, the private sector may in normal times under - price the value of liquidity, which in itself increases the probability of a liquidity crisis in the future. see adrian, t., and h. shin, ( 2010 ), “ financial intermediaries and monetary economics ”, forthcoming in handbook of monetary economics, edited by b. friedmann and m. woodford ; borio, c., and h. zhu, (

producing standard grade than higher grade matric passes in mathematics. standard grade passes increased from 75 543 to 123 813 between 1997 and 2007. higher grade passes dipped from an initial 29 475 to 19 327 in 2000 and recovered to 25 415 passes in 2007. although the total number of graduates increased from 578 134 in 2000 to 741 380 in 2006, the share of science, engineering and technology graduates moved marginally from 25, 5 per cent to 28, 5 per cent over the same period. 8 opening up to the international community increased globalisation has been one of the defining characteristics of the world economy over the last two decades. the advent of democracy in 1994 ushered in a new era in south africa ’ s economic history. at the heart of this process was the integration of the domestic economy into the world economy. prior to 1994, apartheid south africa faced large - scale international financial sanctions and isolation. this stifled economic activity in numerous ways. for instance, access to foreign sources of finance was blocked in the mid - 1980s, resulting in a debt standstill in 1985 as south africa could no longer roll over its foreign borrowing and honour its commitments. unable to tap foreign savings, south africa had to finance all its investment from its own domestic savings, and was therefore forced to run surpluses on the current account of the balance of payments. this, in turn, implied generally strict economic policy settings aimed at moderating domestic income and expenditure, thereby reducing imports. with the transition to democracy, international sanctions were lifted away as the global community embraced south africa. whereas from 1985 to 1993 net outflows of financial capital averaging 2, 4 per cent of gross domestic product were recorded, financial inflows have subsequently been registered in every year but one. the average net inflow from 1994 to 2008 amounted to 3, 2 per cent of gross domestic product, augmenting domestic savings and making it possible to import more and grow faster. statistics south africa. labour force survey : historical revision march series 2001 to 2007, pretoria, august 2008. statistics south africa. community survey 2007, pretoria, 2008. ibid. the presidency, republic of south africa. development indicators 2008 ( www. thepresidency. gov. za ), 2008. significant reform of our trade policies has resulted in trade as a ratio of gdp increasing from around 40 per cent in the early 1990s to around 70 per cent in 2008. the nature of our trading relations has also changed significantly. in the early to mid -