1973, P. 208  BIS Review 2/2001  1  against the yen. It took place in an environment where neither current nor expected inflation differentials have changed to any noticeable extent. Second, the volatility of floating exchange rates by far exceeds the volatility of the fundamentals. It is impossible to explain short- and medium-term exchange rate fluctuations with the aid of traditional fundamental factors such as inflation and productivity differentials. Against the background of such experiences, it is hardly surprising that two considerations characterise the ongoing discussion on currency regimes. First: Floating versus pegging is not a question of right or wrong. What seems appropriate for one country may be a bad choice for another economy. Structural differences in trade flows, productive capacities, features of the financial sector and the credibility of the political process may result in different choices. Second: Even among ardent protagonists of floating the dogmatic position that central banks should take an attitude of benign neglect towards exchange rate movements is out of favour. The exchange rate is generally regarded as a core determinant of monetary conditions to be carefully taken into account when money market interest rates are set. This aspect of policy making is of particular importance in small and medium-sized, open economies. Short- and medium-term adjustments – Muddling through in ignorance Taking the Forex environment into account, however, does not mean actively steering exchange rates by fine-tuning. Such an endeavour would not only jeopardise stability goals.
Christian Noyer: A new regulatory framework for a new financial system Speech by Mr Christian Noyer, Governor of the Bank of France, at a round table discussion at the University of Paris-Dauphine, Paris, 11 December 2008. *  *  *  Ladies and Gentlemen, It is a great pleasure for me to take part in this round table discussion. Today, the prevailing view is – and justly so – that it is necessary to rethink financial regulation. There are two reasons for this: a)  Financial markets and banks are, more or less strongly, confronted with problems of asymmetric information;  b)  Operational inefficiencies may arise, leading, in some extreme cases, to the seizing up of certain market segments. Needless to say that these imperfections are interconnected. In many respects, the financial crisis is the expression of these imperfections. Three examples can be used as an illustration. The underestimation of risk and the mispricing of assets during the upswing of the financial cycle show that markets may generate excess investment in certain sectors of the economy (e.g. the US real estate sector). Furthermore, it appears that financial innovation and the change in banks’ economic models have resulted in a significant increase in information asymmetries and, more importantly, in lower incentives for economic agents to pay attention to these asymmetries. Lastly, the fact that some market segments seized up during the crisis suggests that some infrastructures necessary for their functioning are lacking.