. ” american economic review, 100 ( 1 ), pp. 304 – 36. see grab, j., and r. lafarguette ( 2015 ), “ differences in exchange rate pass - through in the euro area : the role of currency invoicing ”. european central bank, mimeo, frankfurt am main. bis central bankers ’ speeches and that the rise of participation in global value chains explains on average 40 % of the fall in the elasticity. 20 another feature that can alter the role of the exchange rate as a shock absorber is related to the existence of global financial cycles. some have suggested that rather than being driven by the response to traditional demand and supply shocks, exchange rates react to shocks to the leverage and risk appetite of financial intermediaries. 21 as a result, exchange rates are largely determined by capital flows unrelated to fundamentals and seldom act as shock absorbers for the real economy. others have even claimed that in major advanced economies exchange rates are a source of macroeconomic fluctuations. 22 for example, hyun shin and co - authors have argued that exchange rates can contribute to the global financial cycle by reducing the perceived credit risk in countries experiencing capital inflows, only to precipitate crises when flows reverse and credit risk soars. 23 moreover, even the traditional trilemma arguing that exchange rate flexibility is a sufficient condition for monetary policy autonomy under the assumption of globalised financial markets is not as robust as we thought. helene rey has recently argued that in the presence of largely unrestricted capital flows driven by a global financial cycle, flexible exchange rates are not a sufficient condition for monetary independence. 24 as result, the ‘ trilemma ’ in international macroeconomics may have grown smaller and become a dilemma. this, as such, does not question the usefulness of flexible exchange rates. in a small open economy where financial conditions are driven by a larger economy ( the “ centre ” ), exchange rate adjustment can still mitigate the monetary policy reaction when the centre lifts its interest rates up or down. but given the financial frictions likely to be involved, it cannot be taken for granted that monetary policy will be fully insulated. these insights lead me to ask the following question : do freely floating exchange rates along with largely unrestricted capital flows still provide the basis for a well - functioning international monetary system? i don ’ t intend to provide an answer today. i know very well that when it comes to the marshall - lerner elasticities

functioning international adjustment mechanism and more benefits from international financial integration that what we have been witnessing over say the past decade or so. to successfully build such a new consensus, we need research in the area of international economics that is not just aimed at underpinning the growing evidence that the current system is unable to deal with the lingering problems, but that will also deliver the tools to allow policy makers to build and implement a better global international economic system. otherwise, we risk policy being made on the basis of ideas that no longer hold – or as keynes famously put it, based on “ voices in the air ”. source : ecb calculation based on cœure, b. ( 2013 ), “ global liquidity and international risk - sharing in the post - crisis environment ”. speech at the bank of korea international conference 2013 “ assessing global liquidity in a global framework ”, seoul, 3 june. a correlation between domestic savings and investment can, however also reflect an adjustment to certain shocks in the absence of obstacles to financial integration, see giannone, d., and m. lenza ( 2009 ), “ the feldstein - horioka fact ”, nber chapters, in : nber international seminar on macroeconomics, pp. 103 – 117g. see cœure, b. ( 2014 ), “ completing the single market in capital ”. speech at the icma capital market lectures series, paris, 19 may. bis central bankers ’ speeches