And yet, the G20 lacks the legitimacy that has historically been associated with a truly multilateral framework. Other countries do not participate, directly or indirectly, but are called upon to contribute to efforts that others have agreed. The vast majority of the members of the IMF have no voice or representation in these discussions, including all low-income countries and most emerging economies. All in all, multilateral cooperation and collective action functioned reasonably well during the crisis. With the world recovering from the crisis, the G20 should strive for wider acceptance and legitimacy to make sure that the basis for strong multilateral cooperation and collective action is also in place when policies for reform and prevention are implemented. Truly global challenges call for truly global solutions anchored in a multilateral and statutory-based system of representation like the Bretton Wood Institutions. All countries, large and small, rich and poor, should be represented, even if only indirectly through constituencies. General government fiscal balances As a percentage of nominal GDP, 2000–2011 Projections from OECD for 2010–2011  These are some lessons learned from the crisis. Still, several unresolved questions remain. 6  BIS Review 113/2010  The chart shows general government fiscal balances as a percentage of GDP in selected countries. Many countries had negative fiscal balances through the last decade despite moderate to high economic growth. Spain seemed to be in a different position with a positive fiscal balance, though this was mainly due to unsustainable high growth in the construction sector.

As pointed out by Markus Brunnermeier, the willingness of central banks to continue making large purchases of private assets long after the end of the Global Financial Crisis has led to “a build-up of private debt, depressed credit spreads, distorted price signals, and high house prices from increased mortgage lending.” [12] The second concern is the feedback loop from these vulnerabilities constraining future monetary policy options. If these vulnerabilities are significant, the central bank may be concerned that the tightening of monetary policy necessary to bring down inflation to target could trigger financial instability – in other words, financial dominance. A practical way monetary policy could minimise the risk of financial dominance is to use inflation targeting more flexibly. A criticism of inflation targeting is that it has been too much of a straitjacket on monetary policies: for example, keeping interest rates low for long to get inflation up to the target of 2% led to a build-up of financial vulnerabilities. I think the problem is not with inflation targeting per se but with not using it flexibly enough. There are two ways in which inflation targeting can be pursued more flexibly to minimise financial vulnerabilities. One, take time to bring inflation back to target. The BIS, for instance, advocates lengthening the monetary policy horizon to take financial stability consequences of monetary policy more fully into account. [13] But allowing inflation to persist for too long away from the target runs the risk of unhinging inflation expectations.