no inclination on the part of the fed to move to a less expansionary stance of monetary policy. the united states makes its monetary policy for its own domestic needs : no - one could expect it ( or any other country ) to do otherwise. the problem is that a number of other countries, which fix their exchange rates to the us dollar, effectively also match us monetary policy. another group of countries, even though they have no desire to match us monetary policy, are nevertheless limited in the extent to which they can depart from it by exchange rate considerations. the net effect of all this is that, to some extent, the united states sets the world ’ s monetary policy - a partial return to the situation that prevailed under the bretton woods system. this may or may not be a bad thing, depending on where you view it from. for some parts of the world, where economic activity is subdued and domestic inflationary pressures non - existent, an extremely low interest rate structure like that in the united states may be suitable. but for other parts of the world, it could lead to the build - up of imbalances. for the world as a whole, we do not yet know whether the maintenance of an extremely low average interest rate is helpful or harmful to its longer - term interests. on the one hand, the after - effects of the bursting of asset price bubbles are still exerting downward pressure on goods and services prices in the united states and europe, and in japan ( where it has been going on for a decade or more ). more importantly, the downward pressure on goods prices - particularly internationally traded manufactured goods prices - caused by the massive expansion in chinese capacity continues apace. this is a structural phenomenon which has been with us for some time now and can be expected to remain important for the foreseeable future, particularly with india joining in. it is what economists call a positive supply shock, and among many of its effects, the one most relevant to the current discussion is that it has made the maintenance of low cpi inflation easier than it formerly was. while these influences are important, we should not forget that the international business cycle is also alive and well, and can be expected to have an influence as we go forward. good economic growth and expansionary policies are now starting to make their presence felt in a range of international markets. commodity prices ( as shown in the crb index, graph 4 ) have risen over the past two years and are now at their highest level

other price increases. this new less volatile environment allows the floating exchange rate to do its job of stabilising the domestic economy in the face of an external shock. it does so by reducing the tendency for the expansionary effects of a falling exchange rate to be dissipated in the form of rising inflation. it also goes without saying that the low inflation environment makes the task of monetary management a lot easier. i think we can take some satisfaction about how events have turned out over the past two years, but we should not become complacent. this particular episode, which started as a regional asian crisis, is far from over. we should not think that we can see the end of it just because it has already been running for 18 months. for a start, the united states has only recently started its slowdown, and uncertainty about the us outlook seems greater at present than for some time. in addition, japan remains gripped by powerful contractionary forces. that could put continued pressure on commodity prices. much has been said recently about how asia has passed the worst of its problems, and on many measures this is so. but the contractions have been very severe in many cases, and no - one is expecting a quick or strong recovery. i do not wish to say any more at this stage. you will note that i have dealt exclusively with the domestic economy, but i think that is appropriate since i have spoken so much recently in other places about asia, the world economy, and international financial markets. my colleagues and i are, of course, happy to answer any questions you may have on the topics i have not covered, or for that matter, on the ones i have.