of writing the wrong policy prescription. i do not go into the details of economic policy in each country, but i think that it is crucial to maintain the flexibility of the economic structure to smoothly reallocate labor and capital from the lower productivity sector to the higher productivity sector. that is, however, not necessarily easy, given the social climate after the burst of bubble, just i mentioned. fifth, we cannot rule out the possibility that the current unprecedented easy monetary policy in many advanced countries, if continued for an extended period, will produce unintended consequences. under the easy monetary condition, inefficient businesses tend to be preserved, and economic rejuvenation also tends to be delayed, thereby reducing the productivity growth. although easy monetary policy is needed, it alone cannot solve the problem. structural reform is indispensable. also, it cannot be denied that such easy monetary condition is likely to contribute to the emergence of another bubble. in fact, the prolonged low interest rates in the early 2000s, in the aftermath of intensified deflationary concern stemming from the burst of the dot - com bubble, partly contributed to the global credit bubble. a crisis comes to the surface with a different face every time. the current recovery in advanced countries is basically supported by strong growth in emerging countries. thus, if the strong growth in emerging countries turns out to be the one entailing the bubble - like nature, advanced countries as well as emerging countries themselves will be affected significantly. as for equity price developments, advanced countries still stay far below the level before the failure of lehman brothers, while a few emerging countries are reaching an all - time high due partly to capital inflows from advance countries. in some sense, it can be said that monetary easing in advanced countries has exerted stimulative effects through capital outflows to emerging countries. that suggests a significant change in the transmission mechanism of monetary policy from the conventional mechanism we generally assume. sixth, we need to implement financial reform in a well - balanced manner. in light of the lessons from the recent crisis, it is a fairly appropriate direction of the reform to strengthen the existing capital requirement. at the same time, it is also necessary to avoid undermining the economic recovery in raising capital requirements. in that regard, i appreciate that the new capital standards, so called “ basel iii ” agreed at the meeting of the group of central bank governors and heads of supervision in september, ensures a good balance between the two requirements

inflows, plans to raise saving in the deficit countries, structural reforms to boost demand in the surplus countries, and even the role and governance of the international financial institutions. what is needed now is a “ grand bargain ” among the major players in the world economy. a bargain that recognises the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism. exchange rates will have to be part of such a bargain, but they logically follow a higher level agreement on rebalancing and sustaining a high level of world demand. a natural forum in which to strike such a bargain is the g20. but to turn the regular round of international meetings into a real agreement will require a revolution, different in nature but no less significant, than that which put the black country on the map. landlocked though the black country may be, our local economy has always been linked to a wider world – by canal, rail, road, and air, even fibre - optic cable. so the manner and speed with which the global imbalances unwind will have a direct impact on the black country and the uk economy as a whole. such developments in the real economy are important also for the monetary policy committee, because they are an important influence on our primary goal of ensuring inflation is on track to meet our 2 % inflation target. recently, inflation has been high and volatile. it is currently above our 2 % target. and the aim of the mpc is to bring it down. but as demand rebalances, we should expect some volatility in inflation as well as in the path of output. during 2008, cpi inflation rose to a peak of 5. 2 %, fell to a low of 1. 1 % in 2009, before increasing again to stand at 3. 1 % now. those movements have mainly reflected changes in vat, volatile energy prices and pass - through from the past exchange rate depreciation. together they have pushed up on measured inflation. though uncomfortable, it is not surprising that inflation has been more volatile than during the nice decade. in 1998, before he joined the bank, charlie bean estimated that the normal variation in the economy would lead inflation to be more than 1 percentage point away from target for around 40 % of the time. and in the past three years, inflation has been more than 1 percentage point away from target in 17 months, or 47 % of the time. yet that was