does not incorporate. the simulation does not fully take into account the rise in stock prices and household wealth - and hence, consumption - that would have been spurred by expectations of higher productivity growth. also, because the simulation does not fully account for the effect of enhanced perceptions of equity returns on exchange rates, it does not produce the rise in the dollar that, in all likelihood, resulted from the productivity surge. 4. slump in foreign domestic demand i would like to turn now to developments at the global level that may have helped to widen the u. s. current account deficit. domestic demand growth has slumped in many foreign economies because of varying combinations of an increase in saving rates and a decline in investment. this weakening of foreign spending has enhanced the supply of capital available to the united states, put downward pressure on u. s. interest rates, and put upward pressure on the dollar. as i said before, i like the u. s. productivity surge story and find it compelling. however, i also like the foreign demand slump story, and i find it compelling. some of the largest industrial economies in the world - japan and the euro area - have been running current account surpluses while experiencing very subdued growth. in the developing world, the east asian economies that went through financial crises in the late 1990s have seen a plunge in their investment rates even as their saving rates have remained extremely high ; the weakness in domestic demand has likely motivated the authorities in these countries to keep their exchange rates competitive to promote export - led growth, a strategy that has also contributed to the u. s. external deficit. 5 more generally, since 1999, the developing countries as a whole have been running current account surpluses - with the industrial countries, mainly the united states, necessarily running current account deficits - for the first time in many years. what does our macroeconomic simulation model say about the likely effect of a slump in foreign consumption and investment spending? the slump lowers the path of foreign gdp, which in turn limits u. s. export sales. additionally, by depressing perceived rates of return abroad, the weakness in foreign demand explains a considerable portion of the run - up in the dollar, as shown in figure 4. finally, weaker u. s. net exports reduce overall u. s. activity and depress interest rates a bit, thus raising domestic consumption and investment spending. taken together, these factors contribute importantly to the widening of the trade deficit since the mid - 1990s. 5. improvements in global financial

of experts had the option of interacting amongst themselves on matters of overlapping or common concerns to evolve a consensus approach. the advisory groups also had the option to include officials from regulatory and government organisations as special invitees to discuss and understand the prevailing position in the relevant standards and codes, for bringing improvements in the existing practices. they also had the benefit of deliberations with market participants, members from professional bodies as well academics. the arrangement afforded the advisory groups an independent or impartial status and prompted a critical evaluation of the relevance and compliance with each of the aforesaid standards and codes. the work of the advisory groups in some cases happened to continue alongside similar subjects addressed by groups constituted by the government or other regulatory bodies. in any case, the work of the advisory groups was considered unprejudiced and non - intrusive to any such official or non - official initiatives taken by others. the advisory groups were requested to take cognisance of these parallel efforts and to provide inputs, wherever necessary. all ten advisory groups have already submitted their reports to the standing committee. the standing committee has made efforts to disseminate these reports as widely as possible including their expeditious posting to the reserve bank website. the committee has also requested the advisory groups to organise seminars for creating awareness and concretising views on recommendations. the committee would also take up regular annual review of the status and progress regarding compliance with, and implementation of standards and codes and submit it to the ministry of finance. changes in legal and policy framework the implementation of the recommendations of advisory groups in relevant sectors would require a co - ordinated approach based on elements of consensus, incentives, technical support, resources and encouragement to concerned institutions and regulatory bodies. broadly speaking, the recommendations of advisory groups can be categorised into three levels, viz., requiring ( a ) constitutional, ( b ) legislative and ( c ) procedural and policy changes. quite a number of recommendations require new legislative enactments or amendments to existing laws, while several others could be implemented by making appropriate changes in the existing policy and procedures under the powers vested to relevant bodies under the law. a few recommendations could also require changes in the constitution of india. some of the issues pertaining to the financial system are also being addressed by the national commission to review the constitution. of these changes, amendments to the legal framework of the country assume utmost importance as they institutionalise changes as formal laws with parliamentary endorsement and, therefore, provide clear