recession, making the output gap even larger. but it does at least succeed in bringing inflation back to target pretty promptly, well within the two - year point. indeed, inflation then falls somewhat below target thereafter, and interest rates fall back sharply, to a level below where they started. perhaps “ a ” stands for “ austere ”, or ( hyper ) “ activist ”. committee b – “ balanced ”, maybe? – is a little gentler in its approach. recognising that a significant existing output gap will do some of the work in reducing inflation it raises rates only a touch. inflation therefore takes longer to come back to target. but it just about gets there by the two - year point and, in the interim, the real side of the economy suffers less and interest rates are less volatile. finally, just for effect, i ’ ve added a comedy mpc ( committee c ). this lot are a bit more random and one can ’ t say their slightly drunken path for policy does much for the stability of anything in the economy, whether inflation, output or ( most obviously ) interest rates themselves. but it ’ s still sufficient to return inflation to target after two years. how is this possible? fundamentally, it ’ s because monetary policy begins to affect inflation not just at but strictly within two years. the peak impact may take some time to build, in this model, and it also persists for some time beyond two years. but as long as policy has any effect at all on inflation before the two - year point, there ’ s an infinite variety of interest - rate paths that can prospectively get you to any given rate at that date. we could invent policies for committees xerxes, yaphet and zog and still not be done. bis central bankers ’ speeches chart 1 : some policy simulations source : bank calculations. this raises a legitimate question. if you can do something about it before then, and all you care about are deviations of inflation from the target – which in our remit “ applies at all times ” – why not try and eliminate them as soon as possible, like our monotheistic friends on committee a? shouldn ’ t the policy horizon simply be the shortest time delay between changes in interest rates and their impact on consumer prices? well one problem is that one can ’ t be entirely sure about what that delay is. as a famous economist once said, monetary policy seems to operate with “ long and variable ”

the eurozone as a single currency area. increasing reliance was placed on monetary policy and, as interest rates reached their zero lower bound in a number of the advanced economies, a range of unconventional policies were introduced, including quantitative easing, which is a process whereby the central bank injects money into the economy by buying government bonds or other assets. the subsequent combination of high liquidity and low interest rates led to a global search for yield, and consequently reinforced strong capital flows into emerging market economies, which had generally recovered from the recession by late 2009. emerging markets, led by china, were seen to be the new engine bis central bankers ’ speeches for global growth, and this development was seen as a tectonic shift in the balance of economic power around the globe. however, these capital inflows created challenges for emerging market economies, as the resulting exchange rate appreciation undermined competitiveness. some emerging markets complained about “ currency wars ” and various policies were implemented to stem these inflows, with very mixed success. but at the same time, stronger exchange rates did help to constrain inflationary pressures, allowing monetary policy more freedom to focus on providing some stimulus to the hesitant growth recovery. a notable structural change in the nature of these capital flows was the predominance of flows into domestic currency bond markets in emerging market economies, with nonresidents holding increasing proportions of domestic bonds. south africa ‘ s experience was no different. in the pre - crisis period, the bulk of portfolio flows to south africa were to the equity market. since 2009 until recently, bond flows predominated and non - resident ownership of the outstanding stock of bonds increased from around 12 per cent in 2007 to around 38 per cent currently. this change in the pattern of flows reinforced the downward pressure on long term bond yields. although this did not have the positive effect on private sector investment that one would generally have expected, it did have a significant effect on the cost of borrowing by government at a time when the counter - cyclical fiscal policy of national treasury was relatively expansionary. these flows also helped to finance the widening current account of the balance of payments. so what has changed? we now appear to be entering a new but still highly uncertain phase of the crisis. growth in the emerging market economies, including china, has been declining, and earlier optimism that emerging markets could decouple from the advanced economies has faded somewhat. at the same time, there are some signs of recovery in the us