traditional relationships between those variables. the fact that official purchases of financial assets are driven by different factors than those driving private investors suggests that we would probably see a somewhat different combination of capital flows, exchange rates and interest rates in the absence of official intervention. this makes the task of assessing the probable trajectory of growth and inflation more complicated. it makes it harder to assess the likely evolution in financial conditions and asset prices. and it makes it harder to assess the effects of the present stance of monetary policy on aggregate demand and inflation. to the extent that these forces act to raise asset prices, lower interest rates and reduce risk premia, it is harder for the markets to assess how much of the very favorable conditions are likely to reflect fundamentals and prove more durable. this can contribute to an increased willingness to raise leverage in the investment community and to take on more exposure to risk. for the same reason, this phenomenon can act to mask or offset the effects of high levels of present and expected future government borrowing on interest rates, perhaps contributing to a false sense of reassurance that we can continue to run large structural deficits without risk of crowding out private investment and damaging future growth. what might this mean for the conduct of monetary policy? to the extent that these forces act to put downward pressure on interest rates and upward pressure on other asset prices, they would contribute to more expansionary financial conditions than would otherwise be the case. and, if all else were equal, which of course is unlikely ever to be the case, monetary policy in the affected countries would have to adjust in response ; policy would have to act to offset these effects in order to achieve the same impact on the future path of demand and inflation. to do otherwise would run the risk that monetary policy would be too accommodative, pulling resources from the future in a way that would alter the trajectory for the growth of the capital stock, perhaps amplifying the imbalances, and compromising the price stability. finally, these aspects of global monetary arrangements and financial conditions have important implications for how we communicate about monetary policy. they strengthen the case for why central banks should be clear about their objectives and credible in their commitment to price stability. they reinforce the case for preserving the flexibility to adjust policy in response to changing conditions. and they underscore the importance of being open about the greater level of uncertainty we face in understanding the forces at work on the trajectory of demand and inflation. central banks, of course, need to

be careful not to convey more certainty about what we know than we reasonably can know. let me conclude by observing that a constellation of factors has aligned to produce the current combination of low world interest rates, low risk premia and large global imbalances. most of these factors are outside the control of u. s. monetary policy, and we do not fully understand their implications for our economy and for policy. the process of global economic integration makes it ever more important that we work to improve our understanding of how this complex of global monetary arrangements affects our objectives. thank you.