rapid rise of swfs and their increasing visibility as large investors in mature markets challenge some long - held assumptions about how the global economy works. in the process, the investment decisions of swfs run the risk of triggering defensive reactions in mature countries. if left unchecked, this process could feed financial protectionism, which would clearly be to the detriment of global economic welfare. to provide some context, i will first describe the rise of swfs. i will then discuss in more detail what i view to be the primary challenge arising from swfs. finally, i will briefly touch upon a number of recent policy proposals. on the basis of these ideas, and drawing on the history of central banking, i will then offer some personal reflections on what a simple but effective policy response might look like. in closing, i will briefly comment on the government of singapore investment corporation ( gic ), one of the most prominent swfs in the world. as you know, ubs last week turned to the gic for a substantial capital injection in connection with losses in the sub - prime credit markets. 2. the rise in sovereign wealth funds i noted at the outset that the rapid growth in swfs is largely a by - product of global macroeconomic imbalances. slide 3 shows that the current account deficit of the us has increased every year since 1992. the deficit surpassed usd 800 billion, or 6 percent of gdp, in 2006. such a large current account deficit is unprecedented in us history. 1 this rise in the us current account deficit has been mirrored almost one to one in the combined rise of surpluses in south east asian countries and oil exporting countries. i will refer to these two country groupings as the surplus regions. by definition, the surplus regions are investing less than they are saving, and hence, both regions are accumulating net financial claims on foreigners. but the underlying reasons for the current account surpluses in the two regions are distinct. the south east asian countries saw an increase in savings and a fall in investment in the wake of the asian financial crisis. 2 since then, these countries have generally continued to pursue a macroeconomic policy mix in support of an export - led growth strategy which sustains these savings - investment patterns. meanwhile, in the oil exporting countries, export revenues have been boosted by the increase in the price of oil since 2000. you can see this in slide 4. since domestic investments in these countries have not increased at the same pace,

for eternity. the ecb employs around 400 economists that constantly help develop and improve macroeconomic models for decision - makers. we also have our own “ think tank ”, which cooperates closely with academia, and that provides cutting - edge research on various monetary policy topics. thanks to them and others, our general equilibrium models now feature a fully - fledged banking sector that accounts for the presence of financial frictions and that also allows us to analyse the effects of macroprudential policies. other models address non - linearities and deal with heterogeneity across countries and economic agents. and don ’ t forget that central banking is not only about macro - level phenomena. bank and financial markets supervisors have to make sense of the complex mesh of principal - agent relationships between lenders, borrowers and financial intermediaries, and to make these contracts incentive - compatible – this requires quite an amount of international organisation and contract theory! think of, say, the seminal work by jean - charles rochet and jean tirole on credit card schemes as twosided markets, which we still use today to understand the fast - changing world of retail payments. policymakers are often caught between a rock and a hard place, between the risk of providing too little insurance and let the economy be scarred by shocks, and providing too much of it and create moral hazard – in contract theory parlance, we have to manage trade - offs between ex - ante and ex - post incentives. this applies to issues as diverse as liquidity regulation or the optimal design of some of our monetary policy instruments, such as the outright monetary transactions. all of this is work in progress. ultimately, the success of policy will always depend on the quality of our models, and the efforts we invest in keeping them up - to - date. and we´ll always benefit from drawing from a portfolio of models and comparing their different answers to our questions. models are not there to tell the truth, but to help structure the conversation on policies and identify key assumptions. to quote again from banerjee and duflo : “ the most valuable thing economists have to share is often not their conclusion, but the path they took to reach it ”. as general eisenhower once said, “ plans are worthless, but planning is everything ”. third, there are no settled answers to applied questions. economics is an empirical science. better and increased data, and a parallel rise in computing power, means we now have answers to questions that