1  3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  The combination of these factors means that US developments have significant spillovers onto both the trade performance and the financial conditions of countries even with relatively limited direct exposure to the US economy. These dynamics are now increasing the risks of a global liquidity trap. In particular, the IMFS is structurally lowering the global equilibrium interest rate, r*, by: -  feeding a global savings glut, as EMEs defensively accumulate reserves of safe US dollar assets against the backdrop of an inadequate and fragmented global financial safety net;  -  reducing the scale of sustainable cross border flows, and as a result lowering the rate of global potential growth; and  -  fattening of the left-hand tail and increasing the downside skew of likely economic outcomes. In an increasingly integrated world, global r* exerts a greater influence on domestic r*.2 As the global equilibrium rate falls, it becomes more difficult for domestic monetary policy makers everywhere to provide the stimulus necessary to achieve their objectives. These dynamics are directly relevant to the current risks of a global slowdown. At present, there are relatively few fundamental imbalances in terms of capacity constraints or indebtedness that would of themselves portend a recession.3 However, the combination of structural imbalances at the heart of the IMFS itself and protectionism are threatening global momentum.

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”.