form of international macro - prudential stabilization. it is important, however, that nothing that is done as a possible short - term palliative be allowed to interrupt the rebalancing and necessary process of normalization that is underway in the global economy. some may use this more forgiving attitude as cover to continue earlier unhelpful practices, but this would only invite a replay of past unpleasant events. exiting from the extraordinary policies that were put in place by several advanced economies to buttress growth is going to be challenging. as many observers have noted, “ we are travelling in uncharted territory. ” but at least the incentives of the countries that are exiting – and those on the receiving end – should be well aligned. no one should want advanced economies to exit too early or too late, and no one benefits from excessive market turbulence. some episodes of increased volatility will no doubt be experienced, but advanced bis central bankers ’ speeches economies are committed to being as transparent as possible in order to minimize surprises and smooth the adjustment process. it is important that countries play by the rules and stand by the commitments that many of them made as part of the g - 20 framework. displaced pressures from exchange rates that are not allowed to move, from capital flows that are directed elsewhere, and from outsized reserves that are looking for a safe home often squeeze small open economies such as canada ’ s and, more critically, frustrate the international adjustment process. bis central bankers ’ speeches

plan that g - 20 leaders outlined in the early days of the crisis, the g - 20 framework, was designed to deliver strong, sustainable and balanced growth. it had four critical and mutually reinforcing parts : ( 1 ) meaningful fiscal consolidation in overly indebted countries ; ( 2 ) sweeping financial sector reform ; ( 3 ) wideranging structural reforms to boost future growth prospects ; and ( 4 ) a necessary rebalancing of global demand between deficit and surplus countries, assisted by more flexible, marketdetermined, exchange rates. the first three parts of the plan would inevitably have contractionary effects in the short run, so a domestic - led expansion of demand in surplus countries was a critical component of the g - 20 plan if global deflation was to be avoided. any positive confidence effects that might be associated with promises of fiscal rectitude and substantive structural reform were likely to be small and insufficient, on their own, to correct the widening output gap. bis central bankers ’ speeches so how have we done? it is safe to say that global economic performance over the past five years has been disappointing. as acknowledged in various g - 20 communiques, growth has been neither strong, nor sustainable nor balanced. shortly after the crisis and the announcement of the g - 20 framework, economists at the bank of canada decided to use their global model to examine three very different scenarios for how the global economy might unfold. the first was the so - called “ good ” scenario, where every player did what it had promised and all four parts of the plan were delivered. it is important to stress, however, that this was not a goldilocks scenario by any means, just something that, in a rough and ready way, would satisfy the requirements of the g - 20 framework. the second scenario was a “ bad ” one, in which no one initially did what they were supposed to. but it assumed that eventually everyone would come around, after a substantial lag, and do the right thing. without this assumption the model and, presumably, the global economy, would explode. the third scenario was actually worse than the bad one, at least for the first few years of the simulation, and our economists called it the “ ugly ” scenario. it involved doing only half the job. more specifically, only the first three parts of the g - 20 framework, which were inherently deflationary, were set in motion. the estimated cumulative costs to the global economy from following