If this divergence in optimal monetary policy stance increases, the strains on the system will grow. Postponed adjustment will only serve to increase vulnerabilities. In the past, the frustration of adjustment by surplus countries generated deflationary pressures on the rest of the world. Similarly, today, the adjustment burden is being shifted to others.
Advanced countries – including Canada, Japan, and the Euro area – have recently seen sizable appreciations of their currencies. The net result could be a suboptimal global recovery, in which the adjustment burden in those countries with large imbalances falls largely on domestic prices and wages rather than on nominal exchange rates.