Its location, however, also depends on the spread, S, with the boom phase of the credit cycle leading IS to shift outwards and the bust phase shifting IS inwards. To complete the story, we just need to add a description of monetary policy. Assuming inflation starts off at target, an inflation targeting central bank will seek to hold the level of demand at potential, so monetary policy is described by MP. In the face of a credit boom, the central bank would then raise the interest rate to negate the expansionary effect on demand, and cut it in the face of a credit bust. The corresponding aggregate demand schedule, incorporating the endogenous policy response, is given by AD in the right-hand panel, together with a conventional upward-sloping aggregate supply schedule, AS; for simplicity, I ignore the possible impact on the supply of goods of changes in the price and availability of credit. A central implication of this analysis is that while it suffices to think in terms of a single representative interest rate in normal conditions, in times of stress the whole set of market rates need to be considered. Consequently, movements in the policy rate alone no longer provide an accurate summary measure of monetary conditions. The importance of this is illustrated in Chart 8, which shows the recent paths of the policy rate in the United States and the United Kingdom, together with representative measures of the cost of bank debt and the  BIS central bankers’ speeches  5  corporate loan rate5.
Our understanding of the transmission channels behind this synchronized increase is still limited.5 These recent events have elicited mixed feelings in the international community. On the one hand, there is the view that the longer the global liquidity persists, the more likely that vulnerabilities will build up in capital‐receiving countries. In this view, a gradual normalization of international liquidity conditions would be a welcome event for those countries where fundamentals are still strong. Furthermore, to the extent that the normalization comes with better prospects for advanced economies, the somewhat tighter access to international borrowing would be accompanied by an increase in external demand. On the other hand, there is the view that a fast reversal of expansionary monetary policies in advanced countries would yield a sudden and important tightening of financial conditions and a surge in financial volatility. Recent years have taught us all too well that a situation like this may have unforeseen consequences. All in all, the final impact of the tapering of QE policies on the rest of the world will depend on when it takes place, how it is done, and what countries do in the meantime. Let me first address the issue of when it will take place. After some speculation earlier this year that tapering would start in September, subsequent developments indicated that the recovery of the US labor market had been more sluggish than initially expected.