In such an environment, where domestic demand is no longer restricted within the amount of the current national income, the current account deficits are not always an indicator of fundamental imbalances. As has been emphasized by an increasing number of scientists, central bankers, and finance ministers, the imbalanced external accounts of individual countries have become rather the rule than an exception (A. Greenspan, M. King). In addition, empirical research, as well as the European institutions (European Central Bank, European Commission) point out that the process of convergence is inevitably accompanied by current account deficits. Secondly, the decrease in the long-term interest rates in the developed economies, and the accompanying reduction in the risk premiums in the developing economies, resulted in investors’ pursuit of higher yield in the developing markets. There are multiple factors determining these developments, on which I would not focus today. What should be underscored is that these global trends channel significant in amount capital flows to the developing economies. Irrespective of the monetary policy regime (fixed or floating exchange rate), the absorption of larger capital inflows inevitably puts the monetary authorities to trial. To illustrate the large scale of this process, I will give Bulgaria as an example, where the capital inflow (in the form of direct investment and debt) was 1.5% of GDP in 1998, and in the recent two years it approximates 15% of GDP.
At the end of the day, the flow of credit from securities markets has the same impact on our respective societies as that from banks. Therefore, central bankers have an obligation to understand the nature of these flows and the risks that they raise. Crucial to our obligations to our citizens is the need to be certain that these credit markets work smoothly and that credit flows efficiently from those most willing and able to bear the risks to those most able to put the funds to good use. This is as true for the United States as it is for any other country, developed or developing. Does this mean that central banks believe that capital markets should be supervised in the same ways banks are overseen? Clearly the answer to this question is no. This is not our role. In my view, central banks broadly have two main responsibilities with respect to the global debt markets. The first is to enhance the price discovery process by promoting transparency in their own actions. The second is to ensure that the banks, as providers of liquidity, perform their proper role in supporting the trading process by making sound credit decisions. In the United States, the Federal Open Market Committee or FOMC has a pronounced effect on the fixed-income market, both through its policy decisions and in the way the Federal Reserve conducts monetary policy. Indeed, an important part of the price discovery process is the anticipation of the Federal Reserve’s future actions.