, but is currently back to 2007 levels ( figure 4 ). the real exchange rate fluctuated significantly over the past three years, but it is currently not significantly away from its 2007 levels ( figure 5 ). short - term interest rate differentials between emerging and industrialized countries have narrowed, since emerging economies also eased their monetary policies ( figure 6 ). this has occurred, after the widening that happened during the crisis, as a result of a faster monetary expansion in the economies that were at the center of the problems, particularly the us. in the future, given the weaker cyclical behavior of developed economies, these differentials will probably increase, providing renewed incentives for capital flows to emerging economies. in this case, the appearance of short - term interest rate differentials would be a symptom of cyclical divergence between developed and emerging economies. furthermore, in the coming years, the fundamentals of economic growth across economic zones, together with the deleveraging process in the developed world, could also encourage more capital flows into emerging economies, even if short - term turbulences in financial markets delay or push back its occurrence. the fact that capitals are flowing into emerging economies with renewed vigor does not mean that all such flows are being absorbed in net terms. if inflows are counteracted by comparable outflows, no significant impact should be felt either by output or the exchange rate. thus, for the purposes of analyzing the exchange rate, it is important to examine net capital flows. given the balance of payments identity, net capital inflows must equal the current account deficit plus the hoarding of international reserves, the latter being equivalent to capital outflows conducted by the central bank. in any case, the prices of assets in the economy may be affected by gross flows depending on their composition, which matters from a financial stability point of view. more complex scenarios are those where capital inflows trigger a credit and a domestic spending boom by financing the leveraging of households, firms or government. in these circumstances, the counterpart of capital inflows is an increase in the current account deficit. if this phenomenon does not occur facing an abrupt capital inflow increase, it means that capitals are flowing out as well. it is less than evident that, from a mere macroeconomic consistency perspective, gross capital inflows or outflows cause severe disruptions. if in the short run, because of frictions in financial markets, momentary illiquidity or portfolio effects, simultaneous

bankers'speeches this is clearly desirable, but it will create some costs during the transition. supply chains need to be restructured and the energy supply reorganised, while greening the economy is likely to increase pressure on some of the metals and minerals that are already in short supply. electric vehicles, for example, use over six times more minerals than conventional cars. 5 so, europe needs a plan to ensure that the necessary investment comes online as quickly and smoothly as possible, with public and private finance reinforcing each other. the next generation eu facility – the €750 billion fund set up to aid the recovery from the pandemic – will help spur public investment over the next few years. almost 40 % of spending has been allocated to the green transition. here in cyprus, you are already building a new lng import terminal, funded largely by grants from the eu6 and loans from the european investment bank. but we need private finance to step up as well, and for that we need to better mobilise europe ’ s large pool of private capital. at present, capital markets in europe are segmented along national lines rather than spanning the continent. that is why the capital markets union – the project to integrate europe ’ s capital markets – has become more important than ever. for our part, the ecb has made it clear that, in the context of the ongoing conflict, we will take whatever action is needed to pursue price stability and safeguard financial stability. we have also put in place a policy response which is tailored to the uncertainty we face today. as i explained last week7 the best way that monetary policy can navigate this uncertainty is to emphasise the principles of optionality, gradualism and flexibility. first, optionality means that we are prepared to react to a range of scenarios, and the course we take will depend on the incoming data. in particular, if the incoming data support the expectation that the medium - term inflation outlook will not weaken even after the end of our net asset purchases, we will conclude net purchases under the asset purchase programme ( app ) in the third quarter. but if the medium - term inflation outlook changes and if financing conditions become inconsistent with further progress towards our 2 % target, we stand ready to revise our schedule for net asset purchases in terms of size and / or duration. second, gradualism means that we will move carefully and adjust our policy as we receive feedback on our actions. any adjustments to the key ecb interest rates