The synchronization and shortening of cycles will probably also increase the volatility of international interest rates. Economies with liquidity constraints and limited access to international financial markets will suffer the most. The policy prescription here is to strengthen fundamentals and open and deepen the integration of both product and capital markets with the rest of the world. The effect of synchronization and shortening of the cycle on international interest rates will probably also be an increase in the volatility of those rates. Coverage against interest rate volatility is an additional argument in favor of integrating the emerging country economies with that of the world. 4. Monetary policy  Another by-product of the new information technology is the blurring of the traditional definitions of money. It is now clearly possibly for the non-banking private sector to create money substitutes on demand. This development will tend to render inefficient the regulation of limited definitions of money as a tool to influence economic activity and prices. If this is so, interest rates will reign unchallenged as a monetary policy tool, while inflation targeting will be in the forefront as a nominal anchor for the economy. By the way, under these conditions it will become extremely difficult to differentiate between financial and non-financial firms. Until a greater synchronization of the cycle becomes evident, the need for an independent monetary policy will necessarily lead to floating exchange rates.
11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  And the challenges are very different in different jurisdictions, not least because of differences in the structure and effectiveness of monetary policy transmission mechanisms.25 But, taken together with other changes in the economy – such as changes in the labour market which appear to have led to some flattening of the wage Phillips curve and changes in the pass-through of labour costs to consumer prices – the probability is that demand management will need to use more tools to stimulate demand in downturns and work harder to prevent macro-economic tail events. There is a lively debate over the extent to which aggressive use of monetary policy tools to stimulate demand creates financial stability risks by inflating asset prices and encouraging risk taking and the build-up of debt. My own view is that this can be overdone. There are, as I have said, deep-seated underlying structural drivers of low for long. We have not seen an explosion of real economy debt in advanced economies in recent years even with very low rates (Chart 2). Debt-to-GDP has not risen in advanced economies, although there has been a rotation from private sector to public sector debt. Prices of real assets like housing have been growing at a moderate pace in most advanced economies.