international monetary fund, april 2007. which emerging economies start, and their size, in terms of population, the adjustment resulting from their current process of growth could take a very long time and could be of considerable magnitude. take emerging asia ( excluding japan ), for example, which represents over 50 % of the global population and 21 % of gdp. the third exception to the conditions specified in the international trade theory relates to the high savings rate of some emerging economies, in particular those in asia. such savings, which are in part precautionary, stem from the lack of a system of social shock absorbers and a developed financial system. income growth in these countries does not translate into comparable increases in consumption, and thus in imports. the fourth exception concerns protectionist practices, explicit or implicit, which are applied in many of these countries and discourage imports. the fifth exception involves the exchange rate policies implemented by various emerging economies, which favour an undervaluation of the currency, creating a competitive advantage in favour of their own products and net savings vis - a - vis the rest of the world. finally, the strong growth of emerging economies puts pressure on the world ’ s scarce resources, increasing their prices and thus resulting in a loss of terms of trade for importing countries. the case of raw materials, the global demand for which increases at a higher rate than supply, is well - known. but there are other, less obvious examples, such as that of secondary and tertiary education. in this sector too, supply has grown less than global demand, leading to greater competition and higher costs for attending the best universities in the world. the experience of recent years suggests that each of these exceptions to the assumptions on which the theory of international trade is based is plausible. this would perhaps explain why the past decade was characterised, at least until the outbreak of the crisis, by a sustained rate of growth among emerging economies but a decreasing rate for advanced economies. it also explains the increase in income dispersion among the latter. if economic policies ignore such developments and continue to aim for unchanged income and consumption dynamics, they will create internal and external imbalances in the economy which will build up over time. such imbalances may also exist for a prolonged period of time, owing to the financial system and the ability to issue debt securities in the national currency. but, by definition, what is not sustainable will sooner or later generate instability, with negative repercussions for the whole economy. the way out

a unique policy stance for the entire world. coordinated policy action is not a surrogate for domestic macroeconomic prudence. we are all convinced that monetary policies geared towards domestic price stability, sound public finances and flexible economic structures create the conditions for an international financial architecture that can last. are there areas in which policy cooperation can help strengthen domestic macroeconomic policies? my short answer is “ yes, there are ”. before giving you concrete examples of beneficial cooperation, let me take a brief theoretical detour, which will make clear why aiming for a globally unified policy stance is undesirable, whereas other types of cooperation are more promising. in an influential paper a few years ago obstfeld and rogoff questioned the conventional wisdom that increased integration of goods and financial markets strengthens the case for policy stance coordination. 1, 2 their theoretical results even suggest that the need for policy stance coordination decreases with the level of international integration. the basic intuition is that integrated goods and financial markets provide a powerful risk - pooling mechanism, leaving policymakers free to focus on minimising the distortions that might hamstring their respective domestic economies. as i noted on previous occasions, the path of policy over the business cycle in the euro area relative to the united states has differed for a number of reasons – and this despite the common conviction that maintaining price stability is the prerequisite for sustainable job creation and economic success. the most important reasons for different policy paths are differences in underlying economic structures and differences in the timing, nature and duration of economic shocks. 3 this being said, there is an interesting sideline in obstfeld and rogoff ’ s paper, which seems to me to be very relevant for the current situation and which would be a fruitful area for future research. the result i mentioned earlier – that tight international linkages do not necessarily strengthen the case for international policy coordination – holds for what i would define as “ normal times ”. in obstfeld and rogoff ’ s words it holds “ unless risk aversion is very high ”. 4 in the current generation of theoretical models, risk aversion is generally considered a constant parameter. i think that recent years and months have taught us an important lesson : attitudes toward risk not only vary over time – for example, following long - term trends – but they do so by waves and oscillations around trends. phases of excessive risk taking can be followed by sudden reversals driven by abrupt global confidence shocks such