moved from a surplus of 2 percent of gdp in the last quarter of 2009, to a deficit of 3. 5 percent of gdp by the end of 2012. sure enough, these patterns could be explained by pull factors. the faster recovery of growth rates in emerging markets, the quick rebound of their commodity prices after the crisis, and the sounder policies being implemented by several of them during the last decade could give reason to allocate more capital to this group of countries. but even if we believe these factors to be important some key questions remain open. for instance, why did this time emerging markets recover relatively quickly from the global shock, while advanced economies stagnated? was it due to better policies, or to the new relevance of china for their external demand, or to another factor? we need to know more of the ultimate causes of this two ‐ speed recovery, and more research on this front would be helpful. imf, regional economic outlook, may 2013. bis central bankers ’ speeches despite the likely role of pull factors, the fact that these phenomena coincided with the timing of the monetary expansion in advanced countries suggests there is a link between them. in fact, many believe that this “ push factor ” played a major role, and recent research lends some support to this view. 2 this afternoon we will be discussing one avenue through which low interest rates in advanced countries may channel capital toward emerging markets : carry trade flows, whose relevance will be addressed in a presentation by craig burnside. the likely role of push factors is not a total surprise, since the recovery of advanced economies in the context of a deleveraging process requires a rebalancing of global demand toward emerging economies. this rebalancing needs the right price signals and quantity responses. two presentations this morning by philippe bacchetta and gian maria milesi ‐ ferretti will touch on the topic of global rebalancing and external adjustment to the crisis. nonetheless, identifying the role of pull versus push factors poses problems akin to those of separating supply and demand. there is still room for research that finds clever identification strategies to settle this question. under most conditions, a situation of abundant capital inflows and low global interest rates is good for developing countries. theory tells us that, in the absence of frictions, international capital flows not only contribute to expand a country ’ s productive capacity, but also allow their citizens to share risk with the rest of the world. however, the presence of pe

budget deficits to open up – this always happens when a decline in economic activity leads to a sharp drop in revenue and increased spending on the safety net – but instead is more due to the fact that these deficits generally have a very large structural component. by structural, i mean that the deficits are projected to be persistent – absent changes in tax and spending policies – even after the individual economies have recovered and the unemployment rates in these countries have fallen as low as is possible, consistent with price stability. fiscal stimulus measures undertaken to support demand have been responsible for much of the recent deterioration in the structural budget deficits. for example, in the united states, the congressional budget office estimates that the structural federal budget deficit rose by nearly $ 1 trillion between fiscal 2007 and fiscal 2009, to $ 1. 1 trillion or 7. 3 percent of potential gdp. obviously, different people have different views as to how much stimulus was needed and the form of that stimulus. but to me it is clear that an accommodative fiscal stance was the appropriate policy response given the circumstances. in the case of the united states, without substantial fiscal stimulus, the economy would have been even weaker and the unemployment rate considerably higher. given the fact that the federal funds rate could not be pushed any lower, fiscal stimulus was indeed important in stabilizing the economy. going forward, however, market participants are worried that many countries are now on unsustainable fiscal paths. by unsustainable, i mean a scenario in which persistently high deficits cause the amount of outstanding debt to rise relative to gdp indefinitely, even if the economy performs well in the future. the concern is that at some point, investors worried about the potential for default would balk, and this would lead to sharply higher interest rates and a fiscal crisis. just as there needs to be a credible exit strategy for monetary policy to anchor inflation expectations, there also needs to be a credible exit strategy from fiscal policy stimulus to anchor expectations about the risks of sovereign debt default. this is not going to be easy for several reasons. even abstracting from considerations involving political will – it is never easy to vote for higher taxes or lower spending – there is also the important issue of timing. the economic recovery is still very fragile. this means that premature fiscal retrenchment could jeopardize the recovery and push a convalescent economy into a double - dip recession. given this risk, why not just wait and see how things go