more interdependent, and old actors whose roles were eroded by new and upcoming stars have found new niches. thus, commercial banks make loans that they repackage and sell to hedge funds, mutual funds and insurance companies ( frequently bypassing investment banks ), but hedge funds also do a lot of trading that improve the revenues of investment banks. many companies bypass commercial banks completely and rely for funding in their initial stages on venture capitalists, that eventually resource to investment banks to float the companies in the stock market. all this in a framework where it is ever more common to observe financial institutions that diversify risks by transforming into massive financial supermarkets that provide services usually associated with commercial banks, investment banks and asset management. this state of affairs certainly means a huge challenge on central bankers and financial regulators. for us these developments might mean the sudden vanishing of a good part of what we knew about the transmission mechanisms by which monetary policy affects the real side of the economy and inflation, and especially its lags. the global financial imbalances, the lack of response of long term rates to tightening, the tame response of prices to the dollar devaluation against the euro, are all events hard to reconcile with the traditional knowledge. for regulators, the actual diversification of risks, and the resilience of the system to large shocks are questions of utmost interest that, however, do not have a proper answer at the moment. in the first case because its hard to know who owns what in terms of risk nowadays, and the other case because we can tell for sure if the shocks we have seen so far were really large enough. the collapse of ltcm in 1998, the dotcom bust in 2000, the amaranth crash were very large shocks indeed, and the fact that we are wondering today whether they were large enough is, in itself, reason for satisfaction, if not complacency. 5. impact of intermediation on emerging economies in this context, emerging economies exhibit better macroeconomic management, which has significantly contributed to improving their financial position, as reflected by narrower spreads. however, the reasons for today ’ s narrow spreads in emerging markets are, in my opinion, beyond market changes resulting from structured products or credit default swaps or the emerging countries ’ mostly sound fundamentals. in my view, many of the reasons lie in the gradual adjustment of global imbalances. an expectation that the us dollar will depreciate is leading investors to seek assets in other cu

. this is a strategic option – not only a by - product of the managed float, but a prudential policy in itself. among other advantages, such a policy ensures macroeconomic stability, enhances confidence in the domestic currency, and reduces the impact of external shocks as well as the cost of public and private financing. while this insurance policy is generally a less visible benefit, in cases of stress recalling to it provides specific advantages in terms of financial and monetary stability, as we could see in the recent critical episodes. finally, one more thing about the managed float. since several studies outlined the theoretical basis and macroeconomic implications of these kinds of regime three decades ago, their use has been growing among emerging countries. indeed, early research on exchange rate management came into being as a result of the collapse of the international monetary system devised at bretton woods, where a sort of peg was established between the various world currencies and the us dollar as the gold standard currency. empirical work expanding and fine - tuning the analysis of many scholars showed that several developed and emerging countries can be considered “ managed floaters. ” less than a half of inflation targeting countries effectively apply a pure float. in this sense, the literature states that the reaction functions of central banks in inflation targeting emerging countries have a significant coefficient for the nominal exchange rate. this means that the exchange rate is an important variable for monetary policy conduct. there are several reasons to avoid sharp fluctuations in the domestic currency and to mitigate excessive volatility, above all in developing countries with a limited capacity to absorb external resources through their capital markets. by mitigating fluctuations around a trend, this regime combines the needs of the various segments of the economy while preserving consistency with the whole of economic policy. recent literature in foreign exchange matters factors in segmentation of and restricted access to financial markets into the analysis. the most relevant conclusions suggest that, in terms of maximizing social welfare, the best choice is a less flexible foreign exchange regime with more limited access to hedge instruments. this argument becomes more convincing where there is nothing like an international monetary system and a weakening economy in the country with the main reserve currency in the world. this is the most realistic conceptual framework for the current stage at which our economy is. furthermore, in our case – with a long tradition of pegs, high inflation, devaluation processes, runs to the us dollar, and a shallow capital market – it is necessary to “ manage ” the float as a transition towards a