for the most part, the evidence seems to suggest that to date the effects have been gradual and limited : a greater role for the direct and indirect effects of import prices ; possibly some damping of unit labor costs, though less so for prices from this channel judging from high profit margins ; and potentially a smaller effect of the domestic output gap and a greater effect of foreign output gaps, but here too the evidence is far from conclusive. in particular, the entry of china, india, and others into the global trading system probably has exerted a modest disinflationary force on prices in the united states in recent years. moreover, we should recognize that these could be one - off effects to the extent that they reflect the global imbalances that i will speak about next, rather than just the integration of emerging - market economies into the global - trading system. if so, any disinflationary effects could dissipate or even be reversed in coming years. for example, the fact that china and some other emerging - market economies have resisted upward pressure on their exchange rates and are running trade surpluses has undoubtedly contributed to their disinflationary effects on the rest of the world. the prices of their exports are lower than they would be if market forces were given greater scope in foreign exchange markets, and they are supplying more goods and services to the rest of the world than they themselves are demanding. these imbalances are not likely to be sustained indefinitely. the elevated rates of national saving in these economies - and, in some, relatively restrained rates of investment are not likely to persist in the face of ongoing improvements in the functioning of their financial markets, increases in the depth of their product markets, and fuller development of economic safety nets. as individuals in these countries are increasingly drawn to investing at home and consuming more of their wealth and as their real wages catch up to past productivity gains, the upward pressures on these countries ’ currencies will intensify, their demand will come into better alignment with their capacity to produce, cost advantages will decline, and these economies will exert less, if any, downward pressure on inflation in the united states or other advanced economies. global imbalances the first thing to keep in mind about global imbalances is their scale. the u. s. current account deficit is enormous - on the order of $ 800 billion or 6 - 1 / 2 percent of gross domestic product - and it is not likely to shrink substantially in the

will be sufficient to effect the necessary changes. adjustment will need to proceed along several dimensions at the same time, including changes in relative prices and in domestic demand around the globe. the role of policy that observation brings me to my final topic - the role of public policy in addressing these imbalances. sound public policies will enhance the chances that any transition will be smooth. they can contribute by facilitating needed adjustments in spending, production, and relative prices and by taking steps to foster strong, flexible product and financial markets that are resilient to more abrupt changes in asset prices and spending patterns, cushioning the effect of any such fluctuations on output and product prices. a permanent correction to the spending imbalances in the united states must involve further progress on fiscal discipline and a long - run solution to the financing problems of entitlement programs - social security, medicare, and medicaid. without a resolution of these fiscal problems, it would be all the more difficult to bring aggregate production and spending into balance and the resultant intensified pressures on interest rates, as the flow of foreign saving into the united states levels out or declines, would exacerbate adjustment difficulties in other sectors. smooth adjustment of global current account imbalances cannot be brought about by actions of the united states alone. our trading partners also need to take steps. indeed, were u. s. domestic demand to moderate and provide less stimulus abroad in the form of reduced demand for exports from our trading partners, central banks in those countries would need to adjust the stance of monetary policy to maintain full utilization of resources. moreover, in many cases, the root cause of deficient domestic demand seems to be more structural than cyclical in nature, calling for more micro - oriented measures to promote flexible and efficient labor and product markets. such initiatives should yield higher productivity growth and more vigorous spending, boosting rates of return on capital investment outside the united states. these changes in turn would boost the demand for u. s. exports and would likely shift portfolio preferences away from dollar - denominated assets. other public policies, here and abroad, can have an important influence on the transition process by working to facilitate market flexibility. for example, increased exchange rate flexibility in key asian currencies will be essential to enable the monetary authorities to contain inflation through marketoriented policies rather than inefficient direct controls. greater flexibility also will enhance the ability of all the world ’ s economies to adapt to the huge increases in the effective supply of