populations. latin american nations, though currently under pressure, have largely succeeded in opening up their economies to international financial flows, and more rapidly rising living standards have been the result. it is clear, nonetheless, that participation in the international financial system with all its benefits carries with it an obligation to maintain a level of stability and a set of strong and transparent institutions and rules if an economy is to participate safely and effectively in markets that have become highly sensitive to misallocation of capital and other policy errors. when domestic financial systems fail for lack of adequate institutional infrastructures, the solution is not to turn back to a less turbulent, but also less prosperous, past regime of capital controls, but to strengthen the domestic institutions that are the prerequisite for engaging in today ’ s international financial system. blocking the exodus or repatriation of capital, as some of the newer participants in the international financial system appear inclined to do after they get into trouble, is, of course, the equivalent of the economy receiving a subsidized injection of funds. if liquidity is tight, the immediate effect of controls can be relief from the strain of meeting obligations and a temporary sense of well - being. this is an illusion however. the obvious consequence of confiscating part, or all, of foreign investors ’ capital and / or income, is to ensure a sharp reduction in the availability of new foreign investment in the future. the presumption that controls can be imposed temporarily, while an economy stabilizes, and then removed, gives insufficient recognition to the imbalances in an economy that emerge when controls are introduced. removing controls subsequently creates its own set of problems, which most governments, inclined to impose controls in the first place, are therefore loathe to do. indeed, controls are often employed to avoid required - - but frequently politically difficult - - economic adjustments. there are many examples in history of controls imposed and removed, but rarely without great difficulty and cost. to be sure, any economy can operate with its borders closed to foreign investment. but the evidence is persuasive that an economy deprived of the benefits of new technologies, and inhospitable to risk capital, will be mired at a suboptimal standard of living and slow growth rate associated with out - of - date technologies. it is often stipulated that while controls on direct foreign investment and its associated technology transfer are growth inhibiting, controls on short - term inflows do not adversely affect economic welfare

, which seemed to have appeared shortly after the turn of the century, quickly gained popularity, capturing the optimistic mood of the times, and central banks were praised for their substantial role in bringing about prosperity. in a sense, the 1990s and 2000s, up until the crisis, were, in fact, the heyday of central banking. one exception, however, was japan, which experienced a prolonged period of sub - par growth and modest but persistent deflation. actually, japan was experiencing profound changes in the economy ahead of other developed economies. while japan had suffered severe stagflation at the time of the first oil crisis of the 1970s, its subsequent economic performance was superior compared with other developed economies, reflecting the restraint in wage increases and appropriate monetary policy. the bubble years of the second half of 1980s were, in this vein, the culmination of all that was good about the japanese economy. the bubble burst in the 1990s, and japan has since been suffering from its lingering effects. it is quite remarkable that economies in north america and europe are now experiencing the same changes that japan has experienced from the 1990s onwards. since 2006, the united states has experienced a drawn - out period of declining house prices. this was only the beginning. financial strains quickly spread around the world engulfing many venerable names both in the united states and europe, and leading to, but not ending with the demise of lehman brothers. as governments and central banks intervened aggressively, the global financial system and the economy subsequently gained a respite, but it was short - lived. beginning from the spring of 2010, cascading problems within the euro area weighed on global economic activity and heightened uncertainties. consequently, output in the developed economies is only 4 percent above the pre - crisis peak, and average growth since 2007 is a paltry 0. 8 percent. what went wrong? what can central banks do to prevent the development of another disruptive bubble? policy makers are certainly in the midst of soul - searching, regarding the conduct of monetary policy and the regulation and supervision of financial institutions in the years leading to and during the crisis. today, i will just stress one point, considering that i have already explained my thinking on another occasion. 3 the key issue is that price stability and financial stability are intricately intertwined. in an environment of price stability, economic agents may come to expect ever more strongly that a prolonged period of low interest rates would be sustained. this could exacerbate financial imbalances