If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronised across countries.43 By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing the SHC. The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new SHC and it displaced the dollar’s dominance in credit markets. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to EMEs. Widespread use of the SHC in international trade and finance would imply that the currencies that compose its basket could gradually be seen as reliable reserve assets, encouraging EMEs to diversify their holdings of safe assets away from the dollar. This would lessen the downward pressure on equilibrium interest rates and help alleviate the global liquidity trap. 41  See https://libra.org/en-US/. For more details, see ‘Enable, Empower, Ensure: A New Finance for the New Economy’, speech by Mark Carney, at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House, London, 20 June 2019. 43 This requires that the other currencies included in the basket backing the global currency are not perfectly correlated with the dollar, which seems likely to be the case given countries face idiosyncratic shocks.

All told, this means that in the face of foreign shocks, EMEs are forced to compromise their monetary sovereignty, temporarily diverting monetary policy away from targeting domestic output and inflation and instead using it to try to stabilise capital flows. While this strategy is the best EMEs can do given the current structure of the international monetary financial system, outcomes for them are a distant second best when compared to those advanced economies that are less exposed to international financial spillovers. See ‘Pull, Push. Pipes’, speech by Mark Carney, Institute of International Finance Spring Membership Meeting, Tokyo, 6 June 2019. Within the Bank’s Capital Flows-at-Risk framework, these actions are estimated to have Capital Flows-at-Risk (that is, capital outflows as a percent of GDP in the fifth percentile of the distribution) by 3% of GDP. 21 Within this, investment funds are growing, accounting for the bulk of the growth in asset management over the last decade. In parallel, investment fund flows to EMEs now account for around one third of total portfolio flows, compared to around one tenth precrisis. 19 20  8  All speeches are available online at www.bankofengland.co.uk/news/speeches  8  ------------------------------The deficiencies of the IMFS affect EMEs more directly than advanced economies, but their consequences influence everyone because they reduce the global equilibrium interest rate. Against the current backdrop of an inadequate and fragmented global financial safety net, EMEs have chosen to self-insure against capital flow volatility by accumulating reserves of safe assets, contributing to Ben Bernanke’s “global savings glut”.