funds rate eventually gets transmitted to other interest rates and impact the economy. thus, the operating procedure of the fed is focussed on keeping the federal funds rate at a preannounced target level. first, based on the outlook of inflation and growth, the target for the federal funds rate is announced by the federal open market committee ( fomc ). second, the fed attempts to adjust the total supply of reserve balances so that it exactly equals demand at the target federal funds rate. this adjustment of total supply of reserve balances available to commercial banks is carried out primarily through open market operations ( omo ) where government bonds or other securities are exchanged for reserves. the omo is largely conducted by arranging overnight repurchase ( repo ) auctions with primary dealers. besides omo, credits provided by the fed to banks at a rate higher than the federal funds rate – called discount rate – play an important role in the implementation of monetary policy. credits are provided under two programmes, viz., primary credit and secondary credit. under primary credit, the fed extends short - term credit to eligible banks at a rate above the target federal funds rate. since the fed operates in a systemic liquidity deficit mode, the interest rate on primary credit acts as the upper ceiling for the federal funds rate. secondary credit is provided only under abnormal circumstances when depository institutions do not qualify for primary credit or for resolution of financial difficulties. understandably, the interest rate charged for this credit is higher than that for primary credit. as such, there was no lower bound for federal funds rate. however, since december 2008, the fed has been providing remuneration to all reserves at the rate of 25 basis points. this rate on reserves is expected to act as the lower bound to the federal funds rate. bank of england let me first illustrate the normal monetary operating procedure of the boe which has been suspended since march 2009 following the global financial crisis. each of the uk banks and building societies, eligible and participating in the reserves - averaging scheme, is required to set its own target of average sterling reserve balances it will hold during a reserve maintenance period. 2 the boe remunerates these reserves holding at the bank rate so long as they are, on an average, over the maintenance period, within a small range around the target. thus, to keep the reserve balances within the target range, banks lend and borrow among themselves in the sterling interbank market. the aim of the bo

of asia in the flattening world? what are the implications of on going asian urbanisation patterns on the future direction of capital flows and world real interest rates? let me address some of these questions in a futuristic scenario. asian urban population is expected to double in the next 30 years ; about 1. 3 billion people, equivalent to about 60 per cent of total expected urban population growth in the world, and equivalent to the urban population growth in asia that took place over the last 50 years, are likely to be added to urban areas in asia during this period. 12 of 21 cities of over 10 million by 2015 will be in asia. so the doubling of the global labour force talked about by venables will accelerate adding to the further flattening of the world, especially if we take account of the resurgence of eastern europe and africa as talked about by svejnar and collier. if large urban agglomerations promote productivity growth, as posited by venables, the shift in the mega city fulcrum to asia is itself suggestive of relatively higher productivity growth in this region. since asia is still a technology follower, with much catching up to do, the potential for further significant productivity growth is high, and hence the likelihood of continuing low inflation in the world. chairman bernanke has earlier talked about the savings glut. since world savings haven ’ t really grown since the late 1990s, while investment has fallen, particularly in asia after the 1997 financial crisis, he could perhaps have talked instead about the investment drought in asia. the relatively higher decline in investment in asia, compared to savings rates, has probably contributed to the emergence of foreign exchange surpluses, and consequent rapid accumulation of foreign exchange reserves, after the 1997 asian crisis. the mirror image, of course, is the us current account deficit, reflecting its opposite savings / investment imbalance. the question is whether the asian relative investment drought will continue well into the future? the expectation of urbanisation in asia in the next 30 years in india, pakistan, bangladesh, vietnam, indonesia and china would suggest that there will be unprecedented demand for investment in infrastructure in the coming decades in this region. chinese infrastructure investment is shifting inward from the coast : this may be less efficient than on the coast and hence the demand for resources could well be correspondingly higher. although india and other countries in south and south east asia may concentrate investments more towards the coast, the backlog of infrastructure investment in india is so