Second, notwithstanding the recent encouraging data, the recovery following the crisis has proved exceptionally weak. The level of UK GDP is still more than 3% below its pre-crisis level. This is the weakest UK recovery on record. And with the exception of Italy, the weakest across the G7 (Chart 2). Third, the sluggish recovery has been accompanied by extraordinary weakness in productivity. The level of private sector productivity has actually fallen over the past five  BIS central bankers’ speeches  1  years: the first time since the late 1800s that productivity has fallen over such a timeframe other than as a result of economic demobilisation following the World Wars (Chart 3). High inflation, anaemic demand and even weaker supply: an extraordinarily challenging economic backdrop against which to set monetary policy. So how did the UK’s inflation targeting framework stand up to this challenge? A post-crisis report card for UK inflation targeting In short, a bit like my old school reports: good, but could do even better. The regime’s main success is that inflation expectations have remained well-anchored despite the sustained period of above target inflation. There is no definitive test or measure of the stability of inflation expectations. But evaluating a wide range of expectations measures along a number of different dimensions presents little evidence that the stability of inflation expectations has lessened to any material extent.1 This stability is all the more striking given that monetary policy was loosened very aggressively during this period.

In particular, a classical Latin American and Caribbean countries (LAC) crisis would show up as an unsustainable disequilibrium between public, private, or foreign savings and investment partially contained by some form of FX control, which turns into a major economic and financial crisis once the currency devaluates. Abundant foreign capital may help prolong the situation for a while, but only to make the inevitable turnaround more damaging. It is important to underscore the role of domestic ER policies. During the upswing, central banks in EMEs often try to curb the resulting appreciation, either through outright currency fixation of heavy FX market intervention. As a number of recent papers have found, these policies tend to reinforce capital flows. 1 When the tide turns, however, these rigid ER regimes are often accompanied by large devaluations, which contribute substantially to insolvency problems in both real and financial domestic sectors. Global financial conditions may thus influence the timing or even the intensity of a domesticallyinduced crisis, but they cannot suppress it altogether. Moreover, such favorable financial conditions usually hit back with a vengeance once local weaknesses reveal themselves. From here we can conclude that appropriate macro policies are necessary to prevent locally-induced cycles, even when powerful global financial forces are at play. The transmission of Global Financial Cycles to EMEs and the role of ER regimes 1  See Maurice Obstfeld, Jonathan D. Ostry, and Mahvash S. Qureshi (2018), “Global Financial Cycles and the Exchange Rate Regime: A Perspective from Emerging Markets,” Discussion Paper #12696, Centre for Economic Policy Research.