that, if there is no increase in global demand to offset the expected increase in desired savings, it may be difficult for monetary policy to effectively fulfill its role as the main short - run economic stabilizer in the years ahead. so, what should policy - makers be doing now to help us avoid a keynesian deflationary gap in the future? as it turns out, most of the policy prescriptions that i spoke about earlier in the context of the resolution of today's imbalances would also address potential problems further ahead. let me now return to those policies and talk about them in a bit more detail. first, one might look to governments to provide an expansionary fiscal policy. in a few economies, there is clearly room for fiscal policy to become more stimulative in order to boost investment and demand. certainly, the economies of emerging asia have the scope to support demand with fiscal policy. but in north america, europe, and japan the scope for fiscal policy to spur demand appears to be very limited, given current debt levels in most of these countries and the increasing demands that aging populations will place on the government sector. the strain on the public purse to meet the needs of our aging populations will be enormous. the situation will be more serious in those countries that have not yet taken steps to ensure that their public pension systems will be able to handle the retirement of the baby - boom generation. unless the ratios of public debt - to - gdp are reduced before this strain is felt, governments in many countries will face the difficult task of reducing services or raising taxes, or both. in any event, public debt in some countries may have already become so large that additional fiscal stimulus might actually be counterproductive. households, anxious about future tax liabilities or the viability of public pensions, might cut back on consumption. this could offset the positive effects of the easier policy stance. but if there is any scope at all for effective fiscal action, i would argue that the emphasis should be on improving the economic infrastructure in a way that can support the production capacity of the economy while, at the same time, helping to meet rising social needs as the working population begins to decline. this might include additional money for education and training, which by adding to human capital, would help maintain the production capacity of the world economy. but if there is one thing that all governments can do to stimulate demand, it is to have appropriate structural policies, and i stress the word " appropriate. " structural

. beyond disruption to financial markets, a disorderly correction might also lead governments to adopt wrong - headed protectionist measures, which would then exacerbate the damage to the global economy. but regardless of how these imbalances are resolved, it is clear that the resolution will require greater net national savings in the united states. investment in the u. s. economy will need more financing from domestic sources - be it from the household, business, or government sectors - and less from foreign sources. this implies an increase in net u. s. exports and a decrease in net exports elsewhere in the world, as well as an increase in domestic demand in other countries. exchange rate movements have an important role to play in this regard, because they can help redirect international trade and investment flows. in this context, efforts by some countries to slow or prevent required adjustments by pegging exchange rates are, in the end, counterproductive. i know that governors zhou and noyer fully understand that, by frustrating market mechanisms, such policies raise the risk of a much larger and more disorderly correction in the future, as well as an outbreak of protectionism. but we should not look to exchange rate movements alone to resolve the existing global imbalances. within the united states, higher interest rates can be expected to lead to increased savings. authorities could also encourage greater national savings with a tighter fiscal policy. and they could implement structural reforms to encourage national savings through taxation, social security premiums, and other measures. but if the united states alone were to act to resolve its imbalance by taking the steps i've just described, it would leave the global economy with much weaker aggregate demand. and so a number of other countries must focus on stimulating domestic demand. this task is made more urgent by the fact that the global economy is currently operating somewhat below capacity. the fact that inflationary pressures are absent globally is evidence of this. 1 / 3 so, how can we stimulate domestic demand outside the united states? clearly, monetary authorities bear most of the responsibility for stabilizing domestic output in the short run and moving their own economies towards full production capacity. but monetary policy may not be as effective as it could be, if there are problems with an economy's structural or fiscal policies. thus, the appropriate policy prescription depends on each country's circumstances. structural reforms to remove market rigidities are important for most of us. many need to improve or develop their financial system so that savings