##heating and price bubbles. newly available information may uncover further financial imbalances in these or other nations. the market perception that the federal reserve will soon start tapering asset purchases has resulted in significant reductions and heightened volatility for asset prices in emerging markets. given the complexity of what could be the overall exit strategies of the united states and other advanced nations, emerging economies necessarily face a highly uncertain external scenario. despite foreseeable adverse financial conditions, it is reasonable to expect that global portfolio adjustments may affect countries less severely if they enjoy stronger economic fundamentals. finally, emerging economies have different policy options at their disposal in the unwinding phase, especially to try to prevent and manage the surfacing of possible problems. the strengthening of the foundations of domestic financial stability and the implementation of structural reforms to enhance productivity growth and investment, have never been more important. for liquidity provision, the sound approach may be to follow bagehot ’ s advice : to only loan to solvent banks and against good collateral and at penalty interest rates. see bagehot, w. ( 1873 ), lombard street : a description of the money market, london. h. s. king. bis central bankers ’ speeches

, among other objectives, to influence market expectations and thereby reduce long - term real interest rates. other advanced economies have followed suit, employing similar features of monetary accommodation. qe is widely seen to support private spending and employment, while stable inflation expectations are maintained. the domestic transmission channels may encompass first, a rise in perceived consumer wealth through increases in asset prices ; second, the rebalancing of investor portfolios toward assets that are imperfect substitutes of those purchased by the fed, typically with higher risk - adjusted returns, thereby making funds cheaper across many productive areas ; and third, signaling that policy interest rates will remain low for an extended period of time, contributing further to the flattening of the yield curve. bis central bankers ’ speeches so far, the expansionary monetary policies in the united states and other advanced countries have been effective at normalizing the functioning of financial markets and, to a certain extent, still open to debate, firming the pace of the ongoing economic recovery. 1 while these benefits were important, there have been some costs and risks associated with the unusually lax monetary policies of advanced countries, among which the following stand out. first, negative real interest rates punish savings and reward investment, thereby implying a transfer of resources from the former activity to the latter. to counter this effect, savings institutions such as mutual and pension funds may seek higher returns in risky assets with price implications that may not be fully understood. second, extraordinarily benign financial conditions may have created an environment of over - leveraging and excess lending, potentially endangering the stability of the financial system. third, the size and composition of the asset purchases may have distorted resource allocation, postponing balance sheet adjustments and crowding out other financial - market players. fourth, the independence of monetary policy from fiscal policy may have been damaged. finally, central banks are navigating in uncharted waters and, hence, risks of higher inflation may emerge if eventual monetary unwinding is inadequate. 2 to different degrees, these costs and risks have impacted emerging economies. in particular, ample global liquidity and the search for yield translated into a financial boom for a variety of asset classes, including local government bonds, currencies, private - sector borrowing, stocks, and real estate. perhaps the most widespread and prolonged effect in emerging economies was the continuous down - shift in yield curves, in tandem with that of the united states, often more significant, pushing domestic interest rates for different maturities to all -