differences in actual and expected inflation contributed to major exchange rate pressures among other currencies in the 1980s and early 1990s. by 1992 - 93, these pressures had reached the breaking point in continental europe and the united kingdom, putting extreme stress on the exchange rate mechanism ( erm ). as well as causing the united kingdom and italy to leave the arrangement, the situation necessitated a widening of the erm intervention bands. what is the current situation? although it is still early days, conditions in exchange and asset markets have improved considerably since 1993. short - term exchange rate volatility, and even the trend movements in bilateral rates, while still significant, are much smaller than those of the previous two decades. i believe that this improved perfomance has a lot to do with the convergence we have seen in recent years towards low and stable rates of inflation among the major industrial countries. but progress on the fiscal front has also been essential, helping to reduce risk premiums and stabilize expectations, both with regard to the long - run viability of the fiscal track in many countries and the prospects for continued low inflation. thus, i would argue that consistently low inflation and improved fiscal positions have brought about more stable, “ better behaved ” exchange rates, just as theory would have predicted. this is not to say that exchange rates have remained absolutely stable over the past four years. they have not. but movements have been more orderly, unlike those of the earlier periods, and most of the observed trends can be explained by the different cyclical positions of countries, the different monetary and fiscal responses, and by changes in world commodity prices. exchange rate movements have, at times, appeared to contribute to trade imbalances or exacerbate existing ones. but this should not be interpreted as evidence that markets are pushing rates in the wrong direction. indeed, imbalances often reflect the fact that economies are at different points of the business cycle. for example, japan has, until very recently, seen the value of its currency decline, on balance, against the u. s. dollar, even though the country is running a large and growing trade surplus. it is obvious that much of the recent movement in the u. s. dollar / yen exchange rate has been driven by the different cyclical positions of the two countries. thus, the relatively low yen has been helping to rejuvenate demand in japan. meanwhile, a strong u. s. dollar has been helping the united states to counter inflationary

for global capital flows, foreign exchange valuation and financial asset prices even if it is mostly anticipated when it occurs. which leads to the key question i want to address in the remainder of my remarks : what should the federal reserve do to minimize the impact? like other central banks, our monetary policy mandate has a domestic focus. our monetary policy actions, though, often have global implications that feed back into the u. s. economy and financial markets, and we need to always keep this in mind. from one perspective, the unconventional nature of monetary policy around the world adds little that is fundamentally new to the challenges that face emes. today ’ s monetary policies simply represent a way of easing that was necessitated by hitting the zero lower bound here and elsewhere. central bankers have managed differences across countries in cyclical positions and policy stances many times in the past. this time should not be fundamentally different. but, from another perspective, we have less experience operating with unconventional monetary policy, we have been in this regime for a long time and this creates more potential uncertainties. these uncertainties put a premium on clear communication among central bis central bankers ’ speeches bankers as well as between central bankers and market participants. in my view, an important fact is that the large scale asset purchase programs undertaken in the united states and elsewhere have dramatically shrunk the size of bond risk premia globally. this new set of monetary policies affects financial asset prices in a different way compared to changes in short - term interest rates, and we should be humble regarding what we claim to understand about this distinction. looking ahead, it seems likely that markets will remain focused on those vulnerabilities that they might have ignored prior to the taper tantrum in 2013. the greater premium on strong fundamentals, policy coherence and predictability will likely remain. although we will undoubtedly experience further bumps in the road. i think we can remain generally optimistic about the prospects for adjustment. but for this to occur, it will be important for market participants to appropriately discriminate across countries, rather than treating emes as a single group. the good news is that many emes generally appear to be better equipped today to handle the fed ’ s prospective exit from its exceptional policy accommodation than they were during past tightening cycles. this reflects the fundamental reforms that emes have put in place over the past 15 years, as well as the hard lessons learned from past periods of market stress. among the positives are : • the absence of peg