After all, over the last eight decades the world has seen three major episodes, with the associated liquidity traps: the Great Depression, the Japanese experience of the 1990s, and the current crisis. By any standards, three episodes within a period of eighty years cannot be regarded as just an “anomaly” in the functioning of the economy, or as something of only minor relevance. On the other hand, the experience with non-conventional policies during the crisis offers some reassurance that the problem posed by the ZLB may in practice be manageable, and that policymakers may therefore be able, if similar circumstances were to arise again, to avoid once again the slide into deflation. In this respect, let me stress again that the ability, on the part of central banks, to provide both conventional and unconventional stimulus to the economy has been substantially enhanced by the anchoring of medium to long run inflation expectations at a level consistent with their price-stability objective. The crisis has therefore illustrated the advantage deriving from stable inflation expectations, which increase the effectiveness of monetary policy in the face of large contractionary shocks by transmitting integrally moves in nominal interest rates into moves in real interest rates. Let me now turn to a final, and separate, lesson of the crisis, pertaining to the necessity of broadening the spectrum of views available to policymakers, and more generally of being more receptive to opinions and positions outside of the “mainstream”. II.5.
According to some, in the past few years alone Hong Kong has been diagnosed with a whole collection of terminal diseases brought by the handover in 1997, the recent regional financial crisis, the “threat” not just from Shanghai but also from Seoul, Singapore and Sydney, the high cost of doing business, declining educational standards, worsening pollution and, believe it or not, too stable a currency as well, and a whole host of other factors. The impending “catastrophe” of China’s entry into the WTO is the latest spectre on the horizon, and no doubt when that one passes without incident more demons will be conjured up. Yet, in this moribund state, we are still managing to struggle along with GDP growth - projected for this year - of 8.5% and export growth at double-digit rates in recent quarters. The World Bank projections on the effects of WTO entry - a doubling in the space of five years of China’s share in international trade (which is itself projected to grow at the rate of about 6% per annum) - suggests that the business “creation effect” stimulated by WTO accession will far outweigh the “diversion effect”. There should, in brief, be more than enough work to keep both Shanghai and Hong Kong busy for a long time to come, and more than enough skill and enterprise available in both cities to enable each to focus on the opportunities that WTO entry will bring.