I find it helpful to summarise the different mechanisms through which asset purchases may boost nominal spending into three broad channels. 4  BIS Review 46/2009  First, the purchases of gilts will act to increase their prices and reduce their yields. This change in the relative attractiveness of holding gilts is likely to cause investors to reallocate their portfolios into other assets, such as corporate bonds, which in turn will tend to reduce the yields on those assets. In so doing, the borrowing costs faced by firms and households should fall. As of today, the Bank has purchased £ of gilts from investors. Second, purchasing assets with central bank reserves will significantly increase the amount of liquidity in the system. This expansion in the supply of money may in itself encourage greater levels of lending and borrowing. Bank deposits are likely to increase, providing banks with a ready source of funding to finance additional lending. Similarly, as the additional liquidity permeates through the economy, companies may feel less constrained by the need to hoard liquidity and more able to undertake investment projects. Third, purchases of high-quality corporate debt should help to improve the functioning of corporate credit markets. Strains on financial institutions’ balance sheets, combined with heightened levels of uncertainty and risk aversion, have impaired the liquidity of key corporate credit markets. Firms’ access to some of these markets has been restricted and the cost of credit inflated.

Many are aging and want to secure their future income through good and safe returns on their investments. We therefore share a common interest in well functioning global capital markets. Asymmetries in financial development prevent us from reaping all the benefits of our savings efforts. These asymmetries exist for good reasons. In many emerging economies, the memories of the 1997–98 crisis are still there. They lead to precautionary behaviors and a very cautious approach to capital market liberalization. Obviously, the case for unrestricted financial development and market liberalization has been somehow weakened by the crisis. Nevertheless, we might be paying a heavy price for the disorganized state of our global financial and monetary system. While real interest rates are historically low, many investments with high returns are not undertaken. Poor and emerging economies growth is, in many cases, constrained by lack of infrastructure. We may face future shortages in many essential commodities because of insufficient investment in the current period. Differences in financial systems also exacerbate capital flows and exchange rate volatility, especially when, as is the case today, monetary policies are widely divergent across countries. Surely, we can do better in the future. Full harmonization and total convergence in financial development between different countries is neither desirable nor feasible. But ensuring that our different financial systems interact harmoniously should be a priority. There are four possible avenues for progress. BIS Review 170/2010  3  First, greater convergence in financial regulation approaches between advanced and emerging economies. Significant advances are being made.