More generally, we know that the global economy operates under an important constraint – the sum of trade balances around the world, properly measured, must add up to zero. When one country follows policies that are designed to increase exports, there must be an offsetting adjustment elsewhere – either higher imports or fewer exports by another country. Similarly, there is the same adding up constraint in terms of the financial flows that accompany trade and investment on the capital account – current account balances around the world – again properly measured – must add up to zero. What this means in practical terms is that the outcomes for economic activity and capital flows for any individual country depend not only on the public policy and private decisions made within that country, but also on policies and mix of activities pursued in other countries. BIS central bankers’ speeches  1  For example, for Germany to have a large trade surplus with the rest of Europe, other European countries must run trade deficits. And if Germany runs such surpluses it must accumulate large financial claims on the other countries. Or, if the U.S. has an unsustainably high level of consumption, the adjustment to a lower, more sustainable level must be offset by greater investment and exports if the U.S. economy is to be able to operate close to full employment. The fact that it takes (at least) two to tango to make these types of adjustments is just another way of saying that our economies are interconnected.
In doing so, the Fed is also continuing to underscore that actions such as our purchase of U.S. government securities are driven exclusively by our monetary policy goals, and that these policy actions will not continue beyond the moment they become inconsistent with our dual mandate objectives. In general, policymakers should strive to ensure that we have both fiscal and monetary policy frameworks that are transparent and viewed as credible and durable. Interconnectedness means that events – be it the tragedy of a Japanese earthquake and tsunami, a revolution in Libya, or a financial crisis sparked by a housing boom and bust in the United States – can be transmitted to domestic economies located far away from the initial source of shock, often at market-speed measured in milliseconds. This interconnectedness underscores our common interest in cooperating not just to facilitate needed economic adjustments, but also to address fragilities in our interconnected global financial system. I think coordination on regulatory matters differs from on macroeconomic issues in two important respects. First, the benefits to cooperation and coordination on certain aspects of regulation seem easier to identify up front. Second, while policy coordination on regulatory issues is also very challenging, it may not be quite as difficult as in the macroeconomic realm. The stakeholders are not typically as numerous or diffuse, the problems are generally easier to identify, the gains from a cooperative solution are more obvious, and the cooperative solutions themselves may be easier to implement. On the regulatory side, I’ll start with a few broad observations.