industry. as a result, world trade continued its decline over several years. so far, protectionist policies have been avoided in the wake of the latest crisis, which makes it possible to reverse the sharp contraction in world trade more rapidly and hence reinvigorate economic growth. one reason why the mistakes of the 1930s have not been repeated this time may be that the world trade organisation ( wto ) was established in the interim. international trade agreements concluded under the auspices of the wto contribute to binding national governments and prevent protectionist measures. by and large, this has worked well during the recent crisis. could the crisis have been avoided? the macroeconomic forces that were unleashed in the years leading up to the financial crisis were strong. it is unlikely that a single country could have stemmed the tide. china ’ s participation in international trade in goods added several hundred million persons to the global workforce over a few years. this increased the room for strong, non - inflationary global growth. china was not prepared, however, to liberalise its capital markets fully. the chinese government was not willing to allow its currency to float freely and the exchange rate against the us dollar was managed. this disabled an important stabiliser and contributed increasing world trade imbalances. long - term interest rates remained low in spite of substantial monetary policy tightening in the us between 2004 and 2006. international organisations such as the bis, oecd, imf and others noted on more than one occasion that growing imbalances in the world economy were a source of concern. but economic policy decisions are the prerogative of national governments. given the policy pursued by china, there were probably limits to what monetary policy in western countries could in reality achieve in terms of rolling back these forces. increased private saving in the us and other deficit countries would probably have required monetary policy tightening sufficient to push up long - term interest rates. alternatively, a substantial increase in public sector saving would have been necessary. both alternatives would probably have led to an economic policy driven downturn. it is demanding to pursue such a policy based on the proposition that a crisis might occur in the future. improved financial regulation would probably have reduced the severity of the financial crisis. regulation and insurance have similar features : in most cases an annual premium must be paid in the form of slightly lower growth. this occurs because capital is not allowed to flow entirely freely to the highest yielding vehicles. in return, regulation can counter the build - up of financial imbalances.

of liquidity into the global economy. clearly, this liquidity helped to encourage the strong growth of recent years. but now, central banks are in the process of removing some of it. the interest rate increases seen to date, and the prospects for more increases to come in some countries, have been associated with somewhat increased volatility in financial markets, as investors adjust their expectations about future growth. this withdrawal of liquidity is completely appropriate, given that the global economy is now likely not too far away from the limits of its capacity. thus, it seems very likely that global growth will slow to a more sustainable pace. ideally, this would take place in a relatively smooth way. but there are a number of risks surrounding this scenario, and there is a possibility that global growth will slow more sharply than desired, to the detriment of our two economies. the most important risk has to do with the way global imbalances are ultimately resolved. there are a couple of concerns here. first, in order to reduce its current account deficit to sustainable levels, the u. s. economy needs to reduce its domestic demand. but as i mentioned, u. s. demand has been a key support for the global economy. so it is crucial that other major players boost their domestic demand to pick up the slack. specifically, it is important that china and the economies of emerging asia take steps to reduce their savings by strengthening household demand. it is also important that demand in europe and japan continue to strengthen, to help global economic growth smoothly " rotate " away from the united states without global demand slowing too much or too quickly. it is crucial that financial markets remain confident that policy - makers are serious about putting the right policies in place to allow for an orderly resolution of imbalances. as long as they have this confidence, financial markets are likely to continue to function smoothly. but my main concern is that if we don't make more progress in implementing the right policies, then we run an increased risk of global financial instability. and such instability could then spill over into trade in goods and services, leading to a dramatic decline in global growth. so, what are the right policies? this will be the subject of the rest of my remarks. let me begin by looking at this question from the perspective of domestic policies before turning to international issues. the right domestic policies my counterpart at the banco central de chile, vittorio corbo, spoke at a conference on central banks and global imbalances