In China, for example, the service sector has grown to more than half of GDP in 2015, much of it driven by a surge in e-commerce and the expansion in logistical services required to support it. Moreover, as the cost of digital technology declines, a wider range of services are becoming more tradable including design, marketing, business processes, and education. Thus not only has the service sector 3  become more important within a country, the share of international trade in services has also increased markedly. The third, and perhaps most unsettling transitional force, is the ultra-accommodative monetary policy stance adopted by major advanced economies. What started out as extraordinary responses to a precipitous crisis, unconventional monetary policy measures have not only been maintained, but in many cases have been applied more intensively with ever greater degree of experimentation and radicalism. It is striking that after all this time, the crisis mentality among policy circles has yet to fully abate. The agglomeration of these transitional forces has had profound impacts on economies the world over. Together, the slowdown in world trade and the shift to services have underpinned important changes in inflation and growth dynamics. In terms of inflation, globalization has for many years increased the importance of foreign factors in price dynamics. Persistently low and more synchronized inflation is partly attributable to the effects of rising competitive pressures in world markets as well as common forces such as falling energy prices. As global trade adjusts, the influence of external factors has regained prominence.
As is well known, the long lags of policy creates a need for central banks to “take the punch bowl away when the party gets going”. Given the longer duration of financial cycles, the need to act well before the risks become obvious may mean that central banks will have to “take the punch bowl away even before the party gets started”. But that is a political economy challenge that needs to be resolved and managed through careful redesign of central bank mandates. Heed must be paid also to institutional arrangements, especially for central banks where the financial supervision authority lies with another body as coordination will be harder. This will take time. But the risks to financial stability is immediate. In the interim, central banks may need to interpret their mandates more flexibly and avoid overly narrow and zealous interpretations of price stability. Inflation targets need to be implemented flexibly and over longer horizons. All the while explaining clearly and consistently the logic of policy. In doing so, it should be stressed that fundamentally, macroeconomic and financial stability are two sides of the same coin. Macroeconomic trajectories cannot be sustainable 9  if the financial sphere is out of equilibrium. And the avoidance of financial boom-bust cycles leads to better economic outcomes over the long run. The perceived trade-off between growth, inflation, and financial stability, therefore, is to a large extent an artifact of the short horizon focus of policy.