asset price increases - as so often in the past. although there is little evidence to date of a general lowering of credit standards, credit growth has been very rapid and loans to finance equity purchases have risen sharply in some countries. ensuring that investors are not sheltered from the consequences of their sometimes misguided investments is important for maintaining prudent lending standards. it is important that the message from central banks is clear : investors should not count on monetary policy underwriting any particular valuation of equity markets. a second and related risk is that high asset prices might lead to complacency about debt levels. household and corporate balance sheets may look healthy when asset prices are stable or increasing, but what if prices fall? similarly, debt servicing ratios for some emerging market countries may look sustainable when market access is improving, but what will happen if interest rates rise? rising levels of household and corporate indebtedness in some industrial countries, as well as rising levels of external indebtedness in a number of emerging market countries, are based on expectations of continued strong growth in income and production. earlier i remarked that the momentum of the world economy and the policy actions taken to date give reason for optimism. however, volatility is intrinsic to financial markets. our experience during the 1990 ’ s clearly demonstrates the danger of basing decisions solely on a single central scenario, rather than on a range of possible - including worst case - scenarios. monetary policy and structural changes let me now briefly touch upon the question of how monetary policy should react to structural changes in the economy? quite a lot of thinking has already been done on this issue, both among academics and policymakers. nevertheless, i believe that more must be done in this field, especially since at least some parts of the world economy have seen something of a productivity shock in recent years. i am deliberately avoiding the buzzword “ new economy ” here, since history has been full of expressions like that ever since the turn of the 19th century. the discussion about monetary policy and a productivity shock is taking place mostly in the united states, in the light of the impressive economic performance there and the acceleration in the rate of productivity growth. so one could certainly ask : what about the rest of the world? the possibility of a productivity breakthrough also in other parts of the world cannot of course be ruled out. higher - or accelerating - productivity growth does indeed pose new challenges for monetary policy. it could set in motion a complex of effects on aggregate supply and demand, on

the lack of cooperation at various levels : inconsistent rulebook before the crisis, the system displayed an interesting dichotomy, with finance being increasingly global while supervision and regulation largely remaining national in scope and only loosely coordinated internationally. the fact that rules and regulations differed for systemic players in areas such as bank capital and liquidity requirements or accounting standards was not thought to be a problem as long as the applicable “ rulebook ” was clear in each jurisdiction. this was consistent with the “ put your house in order ” premise for international cooperation. few observers at the time paid attention to the apparent contradictions inherent in the system, but in hindsight the shortcomings resulting from this arrangement are all too evident. diverging rules and regulations encouraged regulatory arbitrage by financial institutions. more broadly, the system was not equipped to cope with the international nature of the crisis. for example, the absence of a clear cross - border banking resolution framework in europe conditioned the authorities ’ initial response to the crisis in this field, which was initially hesitant and “ national ” in character. the absence of a common rulebook for global financial systems exacerbated other weaknesses in the “ put your house in order ” category, including poor risk management by institutions and a generalised underestimation of risk, leading to an overextended financial sector. global imbalances and negative externalities excessive global imbalances 2 had a major role in creating the fragilities that led to the crisis. policies inspired by the “ put your house in order ” philosophy were the main determinants of obstfeld and rogoff, “ global imbalances and the financial crisis : products of common causes ”, http : / / elsa. berkeley. edu / ~ obstfeld / santabarbara. pdf global imbalances because they lacked medium - term orientation and global coordination. in other words, these policies were excessively short - term and did not fully account for the knock - on effects ( or negative externalities ) on each other. the years prior to 2007 were characterised by low financial market volatility and risk premia across market segments and low yields across the maturity spectrum. in this environment, banks and other investors engaged in a “ search for yield ” spurring financial innovation. the pace of financial innovation exceeded the supervisors ’ and market participants ’ capacity to solve a number of valuation, risk management and incentive issues. the result was a highly opaque system of credit risk distribution. the