The second major difficulty in our present situation relates to the strength of the exchange rate. We are, of course, acutely aware of the problems that this is creating - and has been creating for the past year or so - for those sectors of the economy that are engaged in international trade and exposed to international competition. Given that the UK chemical industry exports nearly two-thirds of its output, and that this country imports nearly 60% of the chemicals we consume, it is just possible that one or two of you are suffering from the strong exchange rate. I only ask you to believe that we both understand and share your concern. From a macro-economic standpoint it is - as I say - important that the pace of growth of aggregate demand should slacken. But it is clearly not desirable - either in terms of sustainability or in terms of the balance of the economy - that the slowdown should simply be a result of a sharp deterioration in our balance of payments. Our problem, potentially, is excess domestic demand. And that is the root of the dilemma. We have needed to tighten policy to moderate the strength of domestic demand. That has no doubt contributed to the continuing strength of the exchange rate - although you can’t plausibly explain anything like all of that strength in terms of relative interest rate movements here and abroad. It certainly has a good deal to do with market perceptions about the future strength of the euro.
Athanasios Orphanides: The role of central banks – lessons from the crisis Panel remarks by Mr Athanasios Orphanides, Governor of the Central Bank of Cyprus, at the VIth International Symposium of the Banque de France on “Which regulation for global imbalances?”, Paris, 4 March 2011. *  *  *  The topic of this session is lessons from the crisis, specifically regarding the role of central banks. Let me start with a question: How do we learn in our profession? The answer, I believe, is that our main guide is history. Indeed, one of the many differences between central banking and the natural sciences is that in central banking, unlike the natural sciences, we cannot run controlled experiments to improve our knowledge. As a result of the crisis, we are experiencing a unique natural experiment to draw lessons from. I fully expect this episode, which unfortunately is still mutating and evolving in some areas, to provide material for myriads of PhD theses and other studies for decades to come. What do we mean by “lessons” for the role of central banks? Lessons in the sense of learning things we did not know? Or in the sense of reaffirming things we knew? In my view, we have some of each but, in addition, we have seen an evolution in the consensus views on familiar questions. Let me focus on just a few1.