it is a matter of concern that the country continues to make only slow progress in areas such as “ innovation ” and “ business sophistication ”, both of which are expected to be key to meeting future developmental objectives. furthermore, it should be acknowledged that, even when the changes have been significant, they are not all negative. in particular, it is encouraging that there is significant progress in the “ goods market efficiency ” category, where the rank has improved markedly, from position 93 in 2008 to 68, although it is a deterioration from last year ’ s rank of 58. this can be seen as a reflection of the early gains from recent initiatives to improve the business climate. since bis central bankers ’ speeches these reforms remain work - in - progress, we should be able to maintain momentum so that further advances can be anticipated with some degree of confidence. the report further indicates that the decline in the overall ranking is concentrated in five areas. these are : infrastructure, macroeconomic environment, health and primary education, labour market efficiency, and technological readiness. i have decided to focus on only three of these pillars, in part because the lacklustre rankings are glaring for the three - year period to - date. first, “ infrastructure ” : the steep decline from 52 in 2008 / 09 to 92 is worrying, especially at a time when government spending in this particular area has been so extensive. hopefully, this investment will soon bear fruit when the beneficial externalities of upgraded roads and improved electricity supply unfold. nevertheless, this serves as a timely reminder of the importance of both investment and adequate provision for maintenance. this includes a contribution by both the public and private sectors, and is especially important if we are to overcome the constraints associated with land - locked economies. second, “ macroeconomic environment ” : the decline in the ranking is even more pronounced than that of “ infrastructure ”, from 22 in 2008 / 09 to 82. i would, however, suggest that this probably exaggerates any underlying deterioration. i have reason to believe that this assessment is driven largely, if not entirely, by recent trends in the fiscal budget which, as you very well know, has registered substantial deficits in recent years, and this is coupled with an accumulation of public debt. we can take comfort in the fact that the government has initiated a medium - term programme of fiscal consolidation which, all things equal, should help reverse the deficit. indeed the relatively small decline from last year ’ s ranking of 74 indicates that this may

my remarks today, i will relax this assumption. once i do so, it will become clear that a sufficiently tough central bank does have the ability to control the price level, regardless of the behavior of the fiscal authority. 3 i will argue that its ability to do so hinges on the nature of its response to the possibility of default on the part of the fiscal authority. i will talk about some of the short - run versus long - run tensions involved in that response. throughout, i will refer to the central bank as cb and the fiscal authority as fa. i will refer to the currency as being dollars, but that should not be viewed as suggesting that i am talking about the united states – or australia. see cochrane ( 2005 ). the present - discounted - value formula for stock price evaluation is based on the assumption that the stock price does not have a bubble component. in the same way, the intertemporal government budget constraint relies on the assumption that the price of neither money nor bonds has a bubble component. this assumption is violated in a wide class of models of money. see bassetto ( 2008 ) for a related analysis. bis central bankers ’ speeches let me start by describing a simple cb policy : a commodity price peg. suppose the central bank holds x ounces of gold. it commits to being willing to buy and sell p dollars for each ounce of gold and has a monetary base of $ px. this policy successfully ties the price level to variations in the price of gold, regardless of the behavior of the fa. what impact does this policy have on the fa? now, when the fa borrows in dollars, it is essentially borrowing in a real commodity : gold. all of the fa ’ s debt is essentially indexed to the price of gold, and it is certainly conceivable that various shocks could lead the fa to default on those obligations. 4 of course, as i have argued elsewhere, this simple policy is generally viewed as suboptimal by macroeconomists. 5 in contrast, suppose that the cb follows an aggressive taylor rule when determining the path of the short - term interest rate. 6 that policy pins down an inflation path in the usual way, regardless of the fa ’ s fiscal plans. 7 however, given that inflation path, the fa ’ s nominal debt is now actually real. this means that if the fa is faced with an unexpected decline in its current and expected future real surpluses, it will be forced to default