But there is no room for complacency, as the overall level of fragmentation remains high, and the disconnect between the dispersion of MFI funding and lending rates reveals a persistent difficulty in monetary policy transmission. During the financial crisis, it also became painfully apparent that cross-border capital flows are subject to sudden stops, in particular in the interbank market.
But the broad contours of the present cycle have been, and will continue to be, driven by the evolution of corporate profits and capital investment. The retrenchment in capital spending over the past year was central to the sharp slowing we experienced in overall activity. The steep rise in high-tech spending that occurred in the early postY2K months was clearly not sustainable.