This is clearly not the case in reality as the US rate is affected by capital flows from the rest of the world which are evidently not easy to “sterilise”. The effectiveness of monetary policy is affected by such influxes. Given that the US interest rate is nevertheless the reference for global financial markets, the reflow of funds produces second- and third-round effects on EMEs and on advanced economies (Chart 9). We are witnessing a paradox: EMEs as a whole are being inundated with short-term capital inflows, and yet they are net capital exporters. We have also failed to understand how these capital flows have increased the liquidity in the financial system and influenced the behaviour of economic agents. For instance, the impact that the pre-crisis low interest rate level had on the propensity of financial institutions to relax credit standards, to increase leverage and to pursue carry trades was underestimated (charts 10, 11, 12). Policy-makers not only ignored it but considered that this had nothing to do with risks to price stability, that it was related to financial stability and had to be addressed through prudential regulation. Another issue which requires further discussion is the role that the financial industry has played in advanced economies. The conventional wisdom is that financial innovation and financial deepening promotes growth. However, the evidence is controversial and it is not clear to what extent the industry has benefited the long-term growth potential of these economies.
Let me put it differently: is potential growth in those economies being affected by the fact that one part of the world, with nearly two-thirds of its population, is growing on average by 6–7% (or more) per year? If so, in what ways? One hypothesis which we may want to assess and test is that the so-called “long term equilibrium” variables which are so important in our economic models are in fact affected by globalisation, as advanced economies are becoming smaller and smaller. Not taking this into account may induce policy-makers to misjudge the situation and cause international surveillance to fail. These are clearly very difficult issues to examine. However, it seems to me that the analysis so far is insufficient. I won’t go into detail but would just like to pose some questions. Growth The first issue, or question, I would like to raise is whether the increase in growth rates in EMEs has had, and will have, a negative or a positive impact on trend growth in advanced economies. Taking a standard neo-classical trade model, the answer depends on various assumptions. The prevailing consensus is that globalisation provides opportunities for all, including advanced economies; their growth will not necessarily suffer. This is the conventional wisdom.