In advanced economies, this was 6 times the level of exports and imports as a % of GDP. This helped to drive unprecedented growth and poverty reduction in the global economy, with the share of the world population living extreme poverty falling over 60% since the 1980s. But financial globalisation also gave rise to a series of regional capital and financial crises that exposed the risks; and the international governance structures did not keep up. It took the great financial crisis and the near-death experience of the global economy to bring home the lesson that a step change in governance was needed. And to create the political will to make it happen. 3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  The response to the great financial crisis has been the largest, most comprehensive set of reforms to the governance of the international financial sector that we have seen. New international standards ensure that banks engaged in cross border activity are far more resilient. They have more and better quality capital to absorb losses and much greater reserves of liquidity to withstand stress. The development of resolution regimes and an international standard for loss absorbency in resolution makes it far more possible for international banks to fail without endangering the whole financial system. OTC derivatives, a key amplifier of the stress and largely unregulated and unreported before the crisis, are now transparent and collateralised – an additional $ is now held globally against all derivatives trades.
For example, while it may capture some important aspects of how asset purchases work it’s not really an accurate representation of how the conventional policy rate is set. That’s fine for today, as I’m focusing more on QE. But one should at least be aware that the monetary authority needn’t vary the supply of reserves in order to change its policy rate[7]. Second, the downward slope of the MD line was often justified, in the textbook account, by the assumption that reserves don’t pay interest. This would mean that any rise in bond yields is bound to make central bank money comparatively less attractive to hold. These days, however, reserves do pay interest (at the official central-bank rate). As a result, central bank money and government debt – the two sides of the QE transaction – are closer substitutes than they otherwise would be. This has the effect of making the downward slope of the MD line less pronounced. Third, the model – the way it was often taught in the textbooks, at least – glosses over the distinction between “narrow” and “broad” money. For the wider economy it’s clearly the second that matters. Firms and households don’t have deposits at the central bank – for them, “money” is  Page 13  what they hold in their commercial bank accounts. But, as conveyed to students, IS-LM elides the two, assuming that the one is just a multiple of the other[8].