As a result, economies which are very open to international trade and business like the UK are likely to have to live with more economic volatility than we would ideally like.6 Implications for monetary policy So, let me sum up my analysis so far. I have identified three potential challenges arising from the “New Global Economy” which is shaping the world of modern business and having such a powerful influence on open international economies like the UK and Jersey. The first is a shift in the centre of economic gravity in the world economy towards Asia – which is likely to become the dominant region in the world economy in the first half of this century. That creates market opportunities for other economies as well as competitive threats, and is likely to result in further structural change as businesses adjust to changing patterns of demand and supply. Supply-side policies – focussing on skills, enterprise and innovation – are the key to maintaining growth and employment in the face of these structural adjustments. The two other challenges I have identified – a prolonged period of upward pressure on energy and commodity prices climate and an increase in global economic volatility more generally – have more significant implications for monetary policy in an open internationally focussed economy like the UK. So how should monetary policy respond? 6  See Sentance (2009a) and Sentance (2009b) for a more detailed discussion.
21  There are currently three countries that use, or plan to use, a leverage ratio, namely the United States, Canada and Switzerland. Switzerland has introduced a leverage ratio for its two large, internationally active banks, which will take effect in 2013. 22  Pressure on banks to reduce leverage has been apparent from discussions in various international fora, such as the G20, which has called for the introduction of leverage ratios, in addition to risk-based capital ratios, in order to prevent banks from arbitraging capital requirements. 36  BIS Review 10/2010  With improving conditions in the economy and financial markets, supportive measures by governments and central banks have progressively less “raison d’être”. The withdrawal of these measures must occur in a timely fashion; being too early or too late could have unwanted implications for the speed at which the new steady state can be reached. In particular, too brisk a phasing-out could lead to a dramatic process of de-leveraging, jeopardising the economic recovery. On the other hand, it is essential to prevent the banking system from relying on support measures for too long, i.e. becoming “addicted” to them. The intermediation role of the central banks during the crisis, if drawn out for too long, may reduce incentives for banks to return to actively operating in the money market. Such a scenario may also weaken incentives to restructure banks’ balance sheets. Credit flows to households and firms represent an indicator of financing conditions and of the prospects of a recovery in economic activity.