policy divergence with the united states — a tradeoff with which i am personally very familiar. spillovers from recent policy tightening monetary policy divergence remains a familiar theme today, but the focus has obviously shifted to the consequences of tighter u. s. monetary policy for the global economy. policy divergence is an ongoing concern given that most afes and many emes have continued to pursue highly accommodative monetary policies that remain appropriate in light of their weaker cyclical positions and subdued levels of underlying inflation. many observers point to the “ taper tantrum ” in 2013 as illustrating how monetary tightening by the federal reserve can potentially have strong contractionary effects on foreign financial conditions. subsequently, the expectation that a steadily improving u. s. labor market would call for tighter u. s. monetary policy — and hence imply greater monetary divergence with our trading partners — helped drive a sharp appreciation of the dollar between the middle of 2014 and the end of last year that was accompanied by capital outflows from many emes. against this backdrop and the concerns it raises, the reaction in financial markets to the fomc ’ s 1 / 3 bis central bankers'speeches decisions to increase the target range for the federal funds rate following its december 2016 and march 2017 meetings — by a cumulative total of 50 basis points — seems benign. the yields on risky foreign bonds, especially in emes, have continued to decline to below historical norms, and global stock prices have risen. the dollar has depreciated since mid - december, especially against emes, and the emes have experienced capital inflows. in my view, this favorable reaction partly reflects a view by market participants that the rate hikes are a signal of the fomc ’ s confidence in the underlying prospects for the u. s. economy that in turn has increased confidence in the global outlook : a strong u. s. economy is a major plus for the global economy. but the main reason for the positive market reaction is that foreign output expansions appear more entrenched, and downside risks to those economies noticeably smaller than in recent years. in europe, unemployment has fallen steadily ; inflation and inflation expectations are moving toward central bank targets ; and, while brexit entails many unknowns, so far it has not resulted in significant financial market disruptions. china ’ s economy also appears to be on a more solid footing, which has helped stabilize the renminbi as well as support growth in other em

##es. the imf staff has taken these developments into account in the april 2017 world economic outlook ( weo ) and forecasts that world gdp growth will be noticeably higher over the next two years than in 2016 — a slight upward revision relative to the october 2016 weo. 5 there may well even be some chance that foreign economies kick into gear enough that u. s. and foreign business conditions become reasonably well aligned, as occurred during the u. s. monetary tightening cycles that began in 1999 and in 2004. in both of those episodes, u. s. exports grew substantially against the backdrop of a brisk expansion in foreign activity and a stable or even slightly depreciating dollar. of course, it is hard to predict whether foreign economies continue to strengthen so that the global economy will move more in sync — as i hope — or if a substantial gap will remain between the business cycle positions of the united states and our foreign trading partners. however, even if monetary policy divergence remains substantial, there is good reason to think that spillovers to foreign economies will be manageable. first, i expect that the fed ’ s removal of accommodation will be driven by a continued expansion of the u. s. economy ; thus, foreign economies are likely to benefit from the developments that induce the fomc to tighten. second, most foreign central banks should be able to mitigate an undesirable tightening of their own financial conditions through appropriate policy actions. an important lesson of the taper tantrum was that effective communication and actions by major central banks, including the european central bank and the bank of england, were helpful in quickly pushing bond yields down to levels that these central banks regarded as appropriate to their economic situation. third, many emes have markedly improved fundamentals — including smaller current account deficits and more anchored inflation expectations — that should allow them to better withstand the effects of u. s. tightening, though some vulnerabilities remain. finally, i expect that u. s. policy normalization will be gradual under likely scenarios for the evolution of output and inflation. a gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the u. s. economy and to mitigate the risk of undesirable spillovers abroad. references ammer, john, michiel de pooter, christopher erceg, and steven kamin ( 2016 ). “ international spillovers of monetary policy, ” ifdp notes. washington :