sensitivity to the global financial cycle ’. banca d ’ italia, temi di discussione ( working papers ), forthcoming. m. obstfeld ( 2015 ), ‘ trilemmas and tradeoffs : living with financial globalization ’. in global liquidity, spillovers to emerging markets and policy responses, edited by claudio raddatz, diego saravia, and jaume ventura, santiago, chile. central bank of chile. a. ciarlone and d. marconi, ‘ financial spillovers to emerging economies : the role of exchange rates and domestic fundamentals ’. banca d ’ italia, questioni di economia e finanza ( occasional papers ), forthcoming. the euro area : a dual role turning to the euro area, let me focus briefly on the international transmission mechanism of monetary policy. despite being a large economic area, the euro zone is not immune to international spillovers. the relative importance of global versus local shocks is increasing as globalisation and financial markets ’ integration advances. us monetary policy, the key driver of the global financial cycle, also influences euro - area financing conditions. at the same time, given that the euro is the second most important currency in the international monetary system, the ecb ’ s monetary policy is itself potentially a source of spillovers ( fig. 2 ). in recent years, extraordinary monetary stimulus has also been provided through unconventional monetary policy measures ; international spillovers have been sizeable. traditionally, monetary policy is thought to have cross - border effects mainly through the implied exchange - rate movements. recent experience, however, has shown that the monetary policy international transmission mechanism may have several dimensions. the international environment is now much more deeply integrated ; portfolio substitution by global asset managers acts as a powerful additional mechanism for transmitting financial shocks across monetary areas. moreover, with policy rates close to their effective lower bound and the eurosystem ’ s balance sheet greatly expanded, the entire macrofinancial environment has been transformed. accordingly, the theoretical framework to study the international transmission of the ecb monetary policy stance has been enriched to take into account the role of the increased global integration of financial markets and the distinctive traits of non - standard measures. unconventional monetary policy can have significant effects abroad through two relatively new channels. the first is the so - called portfolio rebalancing channel of asset purchase programs, which is likely to impact financial conditions beyond currency area boundaries to the extent that domestic and foreign long - term bonds are substitutes. the second channel

, for many countries in the region trade integration is primarily with the euro area ( tab. 4 ) while exchange rates are mainly anchored to the us dollar ( with the exception of tunisia ; tab. 5 ). this creates potential currency mismatches, especially if export proceeds are mainly euro - denominated while debt obligations are in us dollars. policy implications given the interdependencies across the mediterranean countries that i have just described and the ongoing integration with the euro area, it is natural to ask : how should policies be designed in order to promote sustainable capital flows in the mediterranean area? the issue of how to deal with undesired spillovers from policies conducted in the euro area and in the us remains a controversial one. i would like to use the remainder of my time to discuss this question from three perspectives : that of the country ( or area ) generating the spillover effects ( ‘ originating country ’ ), that of the country impacted and, finally, the multilateral approach. should the central banks in originating countries internalise the spillovers of their monetary policy to the rest of the world? the textbook answer to that question is that central banks pursue domestically - focused mandates : thus, they take into account the adverse effects of volatile capital flows only insofar as they negatively affect global financial stability, and through this channel may generate spillback effects to their domestic economy. both conceptually and empirically, the measurement of these spillbacks is very challenging as they depend in part on the policy response of the countries affected. however, central banks can limit adverse monetary policy spillovers, notably through transparency and clear communication of their monetary policy decisions and intentions. the 2013 ‘ taper tantrum ’ episode exemplifies the potentially destabilising effects of policy communication mishaps. in addition, central banks can contribute to the resilience and soundness of their own financial systems with monetary policies designed to support economic activity and with macroprudential policies, as well as in their capacity as financial supervisors where they have such responsibility. this, in turn, contributes to global financial stability, with favourable spillovers to the rest of the world. from the perspective of the countries affected, the question is how can they shield their economies and financial systems from adverse spillovers? experience shows that having strong domestic fundamentals and sound policy frameworks is essential. this usually includes sustainable budgetary positions ; a business environment capable of stimulating investment and attracting fdi ; a policy framework that ensures effective