nominal exchange rates allow their national price levels to adjust over time. but sterilization operations and other policy tools can, and often have, restrained such adjustment. meanwhile, countries with current account deficits should take steps to increase national saving, including by putting in place credible plans to reduce their fiscal deficits in the longer run. the international monetary system, in effect, still suffers from the same asymmetry that bedeviled the bretton woods system – namely, a marked differential in the pressures facing surplus and deficit countries to permit automatic adjustments or to undertake policy to reduce persistent global imbalances. surplus countries can resist adjustment by restricting capital flows and exchange rate movements, but deficit countries are forced to adjust when they run out of international reserves or lose access to external borrowing. this asymmetry has served to inhibit the global rebalancing process, and it could threaten the ongoing recovery : if deficit countries curtail spending without offsetting spending increases in the surplus countries, aggregate demand would decline, with adverse consequences for the global economy. thus, in my view, we need to continue working toward an international monetary system characterized by more - flexible exchange rates, open capital accounts, and independent monetary policies that will facilitate the adjustment of global imbalances. but we must recognize that countries face diverse challenges in such a transition. for countries with undervalued currencies, the adoption of more - flexible exchange rates requires an internal shift in resources across sectors – a transition that takes time. as noted earlier, the recent crisis has also uncovered numerous flaws in the functioning of regulation of our financial system, and these, too, will take time to correct. finally, although i have not addressed this concern in my remarks today, the expansion of public - sector deficits and debts in many countries poses very serious medium - to long - run risks for both the international monetary and financial systems that will need to be addressed. against the background of these longer - term issues, we must also support countries ’ efforts to address their more immediate challenges. some advanced economies struggle with weak demand, high unemployment, and disinflation. many emerging market economies face increasing inflationary pressures and capital inflows amid strong growth. in light of these differing challenges, a cooperative spirit among policymakers is essential to ensure prosperity of the global economy. bis central bankers ’ speeches

janet l yellen : improving the international monetary and financial system speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the international symposium of the banque de france : regulation in the face of global imbalances, paris, 4 march 2011. * * * improving the international monetary and financial system nearly four decades have elapsed since the demise of bretton woods, and during that time, the international monetary and financial system has undergone a significant transformation. the changes that have occurred reflect deliberate policy choices by the official sector as well as the organic interactions of investors, institutions, and advancing technologies. judging by the standards of global economic growth, stable prices, and financial stability, the international monetary and financial system, in its current incarnation, has a decidedly mixed record. wrenching crises and economic distress, notably including the difficult experience of the past several years, have punctuated periods of solid growth, low inflation, and financial stability. thus, the subject of today ’ s discussion is vitally important, and i am pleased to contribute my thoughts on steps we can take to improve our international economic order. 1 in evaluating our policy priorities, i find it helpful to distinguish between the international monetary system and the international financial system. 2 the international monetary system is the set of rules, conventions, and institutions associated with monetary policy, official capital flows, and exchange rates. it also includes mechanisms to provide official sector support to countries facing funding pressures. the international financial system is much broader, encompassing both private and official participants in global financial markets. i consider this distinction important in thinking about how to reduce the incidence and severity of future crises while preserving a prosperous global economy. in the case of the recent global financial crisis and recession, i would apportion responsibility to inadequacies in both the monetary and financial systems. with respect to the international monetary system, the basic story is now quite familiar : strong capital outflows from countries with chronic current account surpluses – in part reflecting heavily managed exchange rates, reserve accumulation, and other shortcomings in the operation of the international monetary system – put downward pressure on real interest rates, in turn boosting asset prices ( particularly for housing ) and enhancing the availability of credit. these developments contributed significantly to the buildup of financial imbalances, but they were not, on their own, sufficient to have engendered the massive financial crisis we experienced. had the additional domestic credit associated with these capital in