Inquiry into the international financial market effects on government policy

Terms of reference

The Committee is concerned about the importance for economic policy of the rapid growth in the extent, speed and sophistication of international financial markets, aided by improvements in communications and information technology. Some of the implications of these developments for the stability of international markets and for the avoidance and management of crises were taken up in the recent Prime Ministers' Task Force on International Financial Reform which the Treasurer, the Hon Peter Costello MP, chaired. But there are many implications for other areas of policy.

One area of central importance that has not been looked at recently concerns the impact of globalisation on the conduct of macro-economic policy. International financial markets clearly attach importance to the quality of a country's macro-economic policies in assessing its attractiveness as a destination for investment. Policy makers must therefore give weight to likely market reactions in the formulation of policy. Some observers see that as a healthy discipline; others have viewed it as impinging on the sovereignty of economic policy. The inquiry could examine these issues, bearing in mind that market judgements can be fallible, and consider the implications of the potential volatility of international markets for the design of macro-economic policies. It could also consider options for improving the information available to markets in order to help ensure their judgements are better based.

Terms of Reference

The following terms of reference were referred by the Treasurer, the Hon Peter Costello MP, on 30 March 1999.

'The globalisation of international financial markets has raised important issues for the conduct of macroeconomic policy and the operation of financial markets. This inquiry will examine these matters with particular reference to:

1. The implications of the globalisation of international financial markets for the conduct of fiscal and monetary policies in Australia, including medium-term and other strategies to cope with potential volatility in markets.

2. Information requirements for the stable and efficient operation of international financial markets, including the provision of information by governments and disclosure by market participants, especially by large market participants including highly leveraged institutions.

3. The relevance to these issues of recent developments in the international framework for financial regulation.'

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