But the point that really should be emphasized is that external surplus and reserves accumulation, for the most part, are a reflection of the dynamic of the adjustment in global investment and saving that has taken place since the Asian financial crisis. This dynamic has been instigated by the configuration of policies pursued by the major economies and by emerging markets, as well as by the development of financial institutions and markets around the world that has sped up and influenced the direction of global capital flows. But why the Asian financial crisis as a starting point? To me, the Asian financial crisis marks a number of important watersheds in the global financial relationship. BIS Review 134/2007  1  First, the crisis reaffirms the dominant roles of market and globalized capital. Second, the severity of the crisis led many emerging economies to rethink their policies of relying on external help for crisis prevention and resolution. And this has led to consideration to selfinsure against risk of crisis, with reserves accumulation becoming an important aspect of this consideration. And third, sharp adjustments in relative prices, especially real exchange rate and real interest rates after the crisis, brought into play the major forces that led to the adjustment in global investment and savings, as well as reserves accumulation. Today, I want to identify three factors as the major forces contributing to external surplus and reserves accumulation. The first is the process of global investment-savings adjustment that I have noted.

Most worryingly, we seem to be confronted with a trade-off between price stability and financial stability, at least in the short term. To borrow a phrase from a recent award-winning movie, everything seems to be related; there are financial vulnerabilities everywhere; and economic and financial shocks seem to happen all at once. Okay, that sounds exaggerated, but I think you get my drift. As with the multiverse, there is much that we do not know about the complex interactions between the real economy and the financial system and their implications for price and financial stability. But policymakers are not entirely clueless. Let me set out four key propositions based on the experience of the last decade: securing both monetary and financial stability requires an integrated framework, combining monetary policy, fiscal policy, and macro-financial policies;  financial sector vulnerabilities are best addressed using a variety of macro-financial policy tools in a coherent manner; monetary policy should remain focused on inflation control but its implications for financial stability must be taken into account; fiscal policy plays an important role in helping to secure both price stability and financial stability; Let me elaborate on each of these. AN INTEGRATED POLICY FRAMEWORK First, securing both monetary and financial stability requires an integrated framework, combining monetary policy, fiscal policy, and macro-financial policies. Macro-financial policies include macroprudential measures, foreign exchange intervention, and capital flow management measures. There are three reasons why we need an integrated policy framework. One, there are important interactions between monetary policy and the financial system.