emes have substantially improved their fiscal and monetary policy frameworks while adopting more flexible exchange rates, a policy that recent research shows provides better insulation from external financial shocks. 6 corporate debt at risk - - the debt of firms with limited debt service capacity - - has been rising in emes, as shown in figure 7. 7 but this rise has been relatively limited outside of china and has begun to reverse as stronger global growth has pushed up earnings. ghosh and others ( 2012 ). these papers generally conclude that many factors, including both “ pull ” and “ push, ” affect eme capital flows. see, for example, obstfeld, ostry, and qureshi ( 2017 ). the results in imf ( 2017 ) also indicate that while global financial conditions explain a significant portion of countries ’ domestic financial conditions, domestic monetary policy changes also play an important role in economies with flexible exchange rates. the interest coverage ratio ( icr ) is the ratio of earnings before interest, tax, depreciation, and amortization to interest expense. a value of 2 or less is typically associated with an increased likelihood of distress. for example, just before the asian financial crisis, firms in korea, thailand, and indonesia had an average icr of 2 ; see pomerleano ( 1998 ). for more on evolution of eme debt at risk and vulnerabilities, see powell ( 2017 ). - 5all that said, i do not dismiss the prospective risks emanating from global policy normalization. some investors and institutions may not be well positioned for a rise in interest rates, even one that markets broadly anticipate. and, of course, future economic conditions may surprise us, as they often do. moreover, the linkages among monetary policy, asset prices, and the mood of global financial markets are not fully understood. some observers have argued that u. s. monetary policy also influences capital flows through its effects on global risk sentiment, with looser policy leading to more positive sentiment in markets and tighter policy depressing sentiment. 8 while those channels may well operate, research at both the fed and the imf suggests that actions by major central banks account for only a relatively small fraction of global financial volatility and capital flow movements. 9 nevertheless, risk sentiment will bear close watching as normalization proceeds around the world. what can the federal reserve do to foster continued financial stability and economic growth as normalization proceeds? we will communicate our policy strategy as

smith, and william wascher ( 2014 ), “ labor force participation : recent developments and future prospects, ” brookings papers on economic activity, fall, pp. 197 – 275 ; for the argument that most of the decline is related to the severity of the recession and is likely reversible, see christopher j. erceg and andrew t. levin ( 2013 ), “ labor force participation and monetary policy in the wake of the great recession, ” imf working paper 13 / 245 ( washington : international monetary fund, july ). see reifschneider, wascher, and wilcox ( 2013 ), “ aggregate supply in the united states, ” in note 8. in fact, as the recovery has progressed, the labor force participation rate and other broad indicators have moved back toward their longer - run trends. bis central bankers ’ speeches about as expected. doing so would, among other benefits, give our economy the best chance to make up lost ground. bis central bankers ’ speeches bis central bankers ’ speeches