the major advanced economies. the question is : to what extent, if at all, can emerging markets insulate themselves from external shocks? the well - known ‘ trilemma ’ tells us that, with free capital mobility, independent monetary policies are possible only if exchange rates are floating. however, the sheer scale of financial globalisation in recent years has led to a rethinking of the trilemma. helene rey2, for example, has posited the existence of a global financial cycle that is strongly related to monetary conditions in the us and to changes in uncertainty and risk aversion. it is argued that, because credit cycles and capital flows respond to global factors, they may be inappropriate for the prevailing cyclical conditions of many economies. this implies that, for some countries, the global cycle can lead to excessive credit growth when the economy is booming and excessive contraction during a downturn. in other words, it is conditions in the advanced economies that determine domestic financial conditions in the smaller economies, and not domestic policy rates. rey, h. 2015. ‘ dilemma, not trilemma : the global financial cycle and monetary policy independence ’. national bureau of economic research working paper no. 21162. page 7 of 11 as obstfeld, ostry, and qureshi3 have pointed out, there are a number of reasons why we would expect monetary policy to be constrained where financial integration pertains. for example, the substitutability between domestic and external financing could limit the effectiveness of domestic policy interest - rate changes on credit extension and asset prices. they also note that, even if we observe divergences between short - term rates as an indicator of insulation, there is likely to be greater comovement of longer - term rates. much will then depend on the extent to which longterm rates influence real variables. for rey, therefore, the trilemma does not exist. rather, it is a dilemma – or what she calls ‘ an irreconcilable duo ’. that is : independent monetary policies are possible if, and only if, the capital account is managed, directly or indirectly, via macroprudential policies. these could include capital controls if macroprudential policies are insufficient. in other words : flexible exchange rates do not ensure independent monetary policies when capital is highly mobile. this is a rather significant conclusion for emerging markets as it means that, under conditions of free capital mobility, monetary - policy independence

market bond index ), indicating that investors share the confidence expressed by international rating agencies and regard south africa in an increasingly positive light in comparison to competitors. non - residents have been very active participants in the domestic bond and equity markets this year. non - resident participation in trading on the bond exchange, measured as the sum of their purchases and sales as a percentage of total purchases and sales of bonds, increased markedly from a level of about 9 per cent in early 2004 to as high as 18, 9 per cent in early 2005. furthermore, non - resident participation in share trading on the jse averaged approximately 20 per cent in both 2004 and 2005 thus far. the eurorand bond market witnessed a flurry of activity this year, with a total net issuance size for 2005 of close to r6 billion, the highest net issuance since 1999. the issuance of rand - denominated bonds by non - resident borrowers in the japanese uridashi market also continued to grow during 2005. rand - denominated bonds were first issued in that market in july 2004 and total issues for that year amounted to r2, 5 billion, while issuance amounted to r7, 5 billion in 2005. the demand for randdenominated bonds issued by highly rated non - resident institutions contributed positively to the value of both the rand and domestic bonds. we also witnessed some secondary listings of foreign companies on the jse limited and the first listing of a non - resident bank on the bond exchange, again displaying confidence in south africa ( the relations between south africa and so many countries in the rest of the global village, evidenced by the number of embassies and high commissions stationed in south africa, bears testimony to this confidence ). the south african banking sector benefited greatly from the improved macroeconomic conditions – profitability, efficiency and the asset quality of banks improved despite continued strong growth in the total loan book. an important structural change also occurred in south africa ’ s banking sector after an international bank obtained a controlling share of a major local bank by means of the largest single foreign direct investment into south africa to date – together with other significant foreign direct investment announcements which are also indicative of an increasingly positive investment outlook for south africa. broadening access to financial services and targeted investment remain high priorities on the agenda for south africa and our financial sector, and the bank continued to monitor and support new initiatives. in terms of a memorandum of understanding between the banking sector and the department of housing, the banking sector will advance