while many liabilities were in foreign currencies – proved a constraint on monetary policy. central bankers understood that any reduction in the policy rate would likely weaken the currency, which in turn would raise the value of domestic borrowers ’ liabilities relative to their assets, with negative consequences for the solvency of both the nonfinancial corporate sector and the banking system. however, in the years following the asian crisis, currency and maturity mismatches were reduced substantially. in sum, stronger macroeconomic and financial fundamentals gave korean policymakers the flexibility they needed to respond to the crisis with more expansionary monetary and fiscal policies. improvements in the bank of korea ’ s monetary framework served the country well during the crisis and are likely to provide additional benefits in the future. over the past decade, many emerging market economies, including korea, have reoriented monetary policy toward domestic price stability and away from a focus on stabilizing exchange rates. the bank of korea, indeed, adopted a formal inflation targeting regime in 1998. since then, the exchange value of the won has become more flexible, inflation has declined to an average of about 3 percent, and – as i have discussed today – the ability of the bank to conduct appropriate countercyclical monetary policies has increased. this anniversary is also a good time to consider the challenges that the bank of korea and other central banks will face in the future. in the medium term, like the federal reserve and many other central banks, the bank of korea will have to manage its exit from accommodative policies. as is typically the case in the early stages of an economic recovery, the bank will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long. because economic conditions vary, the appropriate timing of the exit is likely to differ across countries. to guide these important decisions, each central bank will have to carefully monitor economic developments in its own jurisdiction. financial reform is another important challenge facing central banks, including those in emerging market economies like korea. even though the origins of the recent financial shocks were largely outside the emerging markets, the international transmission of these disturbances was extraordinarily rapid. in the emerging market economies, these disturbances manifested themselves principally in terms of volatile capital flows, with capital outflows earlier in the crisis and capital inflows today each creating significant financial and economic challenges. strengthening the international financial system and ensuring that financial institutions are carefully regulated, well capitalized, liquid

decline steeply in the relatively near term. i say could rather than will because i realize that prediction has been made many times before and has always proved wrong. i guess like so many others i am just struck by the absurdity of moving so many little pieces of paper around the country when the messages could be sent so much more efficiently by electronic means. every time i visit a reserve bank and watch those high speed sorters working so hard and the trucks coming in and out to the airplanes, i think, “ this is a really impressive, fast and cost - effective way of moving paper, but why are we moving paper? ” the “ we, ” of course, is not just the federal reserve, but all those banks and clearing houses and other participants in the system. and the answer to why we are all moving all this paper is that customers want us to move it and are willing to pay to have it done. but the answer still doesn ’ t make a whole lot of sense. there are several interrelated reasons why change could be expected to accelerate in the retail payments arena in the near future. • first, of course, is the rapidity with which technology is evolving and costs are dropping in computing and telecommunications. many types of information, including payments information, can be transmitted much faster and cheaper than was possible even a year or two ago, and there seems to be no end to the process in sight. but the avalanche of technological progress may actually be holding up a great leap forward in the efficiency of retail payments. because the network effect is important and the players who have to commit to a new technology to make it viable are quite numerous, change may come slowly at first. potential players may be confused by the multiplicity of options and reluctant to commit if they think it likely that something faster, cheaper and more convenient may come along soon. it ’ s like hanging on to your old television for a while in hopes that the next generation of models will give you a lot more definition for less money. • a second reason is that the restructuring of the whole financial services industry across geographic and product lines is providing a huge opportunity for major institutions to rethink how they transmit information and make and receive payments. this restructuring, combined with the onrush of technology and the heavy emphasis across all business sectors on competitiveness, cost reduction and efficiency, could accelerate the substitution of electronic for paper based payments at the consumer as well as business level. but in the short - run