we are presently experiencing is matched by unsustainable external imbalances, with many advanced countries running sizable current account deficits, despite their slow growth, while many emes are running sizable surpluses, despite their strong growth ( chart 5 ). in many cases, of course, the export - led development strategies that some emes pursue, and the resulting trade surpluses, are the reason for their phenomenal growth. while exchange rate misalignment is an important external driver of the trade imbalances, a number of internal imbalances have also contributed to the problem, such as runaway government and household debt, and will have to be addressed before a sustainable solution can be achieved. major advanced economies with deficient demand cannot consolidate their fiscal positions and boost household savings without support from the external side in the form of increased foreign demand. meanwhile, emes, seeing their growth decelerate because of sagging demand in advanced countries, are reluctant to abandon a strategy that has served them so well in the past, and have refused to let their exchange rates adjust in a material way. sterilized intervention continued at an accelerating pace over most of the past four years, and new “ macroprudential stabilization tools ” ( i. e., capital controls ) have been introduced to further buttress their defences. advanced countries, receiving limited assistance from some of their most important eme trading partners, have been forced either to use what little fiscal space remains to stimulate their economies or to resort increasingly to unconventional monetary policy remedies, such as the fed ’ s quantitative easing. the latter, in turn, tend to push capital flows toward emes in ever - larger amounts, exacerbating eme concerns about bis central bankers ’ speeches the twin hecubas of sudden stops and destabilizing credit growth, causing them to tighten their controls further ( chart 6 ). the vicious circle that is thereby created, as each waits for the other to do the right thing, threatens to destabilize the entire global economy. how can we escape this “ prisoner ’ s dilemma ”? the g - 20 framework for strong, sustainable and balanced growth offers just such an escape. it has four key components : • fiscal consolidation in those countries that need it ; • a rotation of global demand ( facilitated by greater exchange rate flexibility ) ; • sweeping financial sector reforms ; and • ambitious structural reforms to the real economy to foster higher long - run growth. i will not have

won ’ t try to suggest that the model does more than it can, despite being the best of breed. a healthy degree of caution has to be applied to all such exercises. still, i think you ’ ll find the results interesting. we begin with a base case and use our model to identify a set of conditions that are sufficient for the resolution of global imbalances. these include : • increasing u. s. private savings rates and maintaining them through time at 6 per cent of gdp ; bis central bankers ’ speeches • engineering a gradual, timely and credible fiscal consolidation in the united states, europe and japan ; • allowing the real effective exchange rate for china to appreciate by 20 per cent, while the u. s. dollar depreciates by 15 per cent ; • implementing policies to stimulate domestic demand in china and emerging asia ; and • pursuing a program of gradual but meaningful structural reform in europe and japan to raise potential growth. this should not be interpreted as a goldilocks scenario. it might be possible to do much better with more ambitious and concerted action ; however, it is sufficient to stabilize government debt and deficits, together with current account balances, at sustainable levels. we might call it a “ good, ” as opposed to “ great, ” outcome. in an alternative scenario, we ask what would happen if the implementation of these corrective measures were delayed by five years ( i. e., over our projection horizon ), after which time they are allowed to kick in. in other words, this alternative scenario eventually course corrects and is by no means as bad as it can be. the results for the good and ( somewhat ) bad scenarios are shown in the graph below. postponing the required policy measures in emerging asia, including china, and in the advanced countries produces a cumulative 8 per cent decline in world and u. s. gdp relative to the baseline, while the difference in china ’ s gdp is roughly 12 per cent. in 2017, world gdp is lower by over us $ 7 trillion, and it could well be much worse ( chart 8 ). a third, and separate, scenario that we conducted on an earlier occasion is in many ways even more interesting. it asks what would happen if fiscal consolidation and household balance - sheet repair were actively pursued in the advanced countries – whether voluntarily or driven by impatient financial markets – but without the support of rising external demand in those countries that needed it ( i. e., absent exchange rate