One of the many official reports on the lessons took a mandate about capital flows and turned it into a series of prescriptions on national balance sheets, including being attentive to vulnerabilities and to perverse incentives.1 The emphasis of the Draghi Report was hardly surprising. Brazil, Mexico, and Russia had suffered from mismatches in the maturity and interest-rate structure of their public debt. For Korea, it had been mismatches in the external funding of the banking sector. In Indonesia, the non-financial corporate sector had been overly reliant on short term, foreign-currency-denominated external debt. In each case, the country’s economy was eventually brought to heel by a run. It might have been easy for “developed” economies to ignore the Draghi Report. But efforts were made to draw wider lessons amongst advanced economies. Thus, in late 2000, the Bank of England ran the first of a short series of annual articles that tried to draw out the implications of the UK’s balance sheet for financial stability. It is worth quoting fairly extensively from that first article:2 “It is advisable for authorities to monitor a range of balance sheet indicators, focusing on variables and relationships that have in the past indicated financial fragility.....the size and structure of the economy’s foreign currency debt are particularly relevant, especially for countries on a fixed exchange rate regime. Sound risk management by the public sector warrants particularly high priority. National authorities need to adopt prudent strategies and practices in managing their own debt liabilities and financial and other assets.
A report submitted by an Ad-hoc Group chaired by Jean-Pierre Landau. BIS central bankers’ speeches  5  increase in risk appetite. It is not far fetched to ask whether excess Global Liquidity can result.16 We thus have two broad stories of what kicked off a period of pronounced credit growth and asset price appreciation. First, a fall in the world safe real rate, due to excess savings in the East. Second, increasing Global Liquidity, transmitted through expansive cross-border lending, kicked off by prolonged accommodative monetary policy. These stories are not at all mutually exclusive.17 And, most probably, both contributed to exuberance. But it is not my purpose this evening to revisit how asset-price appreciations that are initially fundamentally warranted can get out of control through the “Minsky” mechanisms of extrapolation of past returns into future targets, herding and myopia18 – the last no doubt aided by exaggerated market beliefs of what monetary policy can achieve following years of uninterrupted growth. Rather, it is important to my purpose this evening that both stories involve shifts in risk premia driven by changes in the supply and demand for financial assets. Shifts in risk premia, gross capital flows, and balance sheet strains That story would hardly have interested most macroeconomists a few years ago. Financial asset prices were regarded as providing useful information because they are forward-looking and available at high frequencies, but no more; they were not seen as actors.