that country actions are both predictable and mutually consistent. given the scale of transition under way, in our view, it makes sense to agree to the long - term objective and then implement short - term measures consistent with a transition to it. our long - term objective should be a well - functioning international monetary system that delivers sufficient nominal stability in exchange rates and domestic prices, with timely adjustment to shocks and structural change. all countries should accept their responsibilities for promoting an open, flexible and resilient system. this responsibility includes recognizing the spillovers between economies and financial systems and working to mitigate them. fundamentally, it means adopting coherent macro policies and allowing real exchange rates to adjust to achieve external balance over time. indeed, in a multipolar world of global capital and trade, all systemically important countries and common economic areas should move towards flexible market - based exchange rates. these objectives will not be realised overnight. however, informal commitments to improve the functioning of the current system could be implemented to guide current policy while maintaining momentum towards the longer - term vision. short - term measures first, as bob zoellick has suggested, major advanced economies should reaffirm the g - 7 norm for flexible exchange rates without intervention, unless special circumstances warrant bis central bankers ’ speeches and the action is agreed. 12 the reality is that unilateral intervention seldom is effective without surrendering monetary sovereignty and control over domestic prices. by reaffirming this principle, advanced economies could set the stage for a broader accord among all systemically important economies. last week ’ s concerted intervention by the g - 7 provides an example of these principles in action. the circumstances were clearly exceptional : movements in the yen had become disorderly, volatility was excessive, and there were potential adverse implications for economic and financial stability. to address these problems and in response to a request of the japanese authorities, the g - 7 acted in concert in foreign exchange markets for the first time since 2000. second, the bank believes there could be value in agreeing to an informal code of conduct for capital flows as a precursor to renewing the more formal articles of agreement of the imf. 13 certain guidelines – in the form of a notional checklist or decision tree – could prove useful to maximize the cost - benefit of capital controls, from both national and global perspectives. capital controls may be appropriate in certain circumstances. sudden capital inflows raise legitimate concerns about currency overvaluation, overheating and, conversely, the

consequences of sudden stops. this is especially true for countries with less - developed capital markets and weak institutional infrastructures, where the capacities to absorb and benefit from large inflows are limited. however, we should all recognise that short - term expediency could take precedence, and eventually turn back the clock on an open, flexible system. this risk grows more tangible as emerging economies become more systemically important. a code of conduct for capital flows could include the following four elements to guide countries during the transition to the long - term system : 1. a clear objective to promote a sustainable and effective flow of private capital between economies in order to facilitate economic growth and prosperity through the efficient allocation of resources, specialization in production, and diversification of risk. 2. a decision framework that recognizes that capital controls should not be the first option. they are a complement to, not a substitute for, macro and macroprudential policies. consideration should always be given to adjusting monetary, exchange rate and fiscal policy, consistent with budgetary and inflation conditions. 3. principles to guide the design of measures : a ) temporary. time - limiting measures recognize that capital controls create distortions, adverse market reactions and negative externalities, as well as the reality that, over time, controls are often evaded. this principle is also consistent with the positive longer - term fundamentals that are driving capital flows to emerging market economies. b ) targeted. measures should address specific vulnerabilities, such as korea ’ s restrictions on foreign exchange derivative contracts. r. zoellick, “ a monetary regime for a multipolar world, ” financial times, 17 february 2011. specifically, articles iv and viii should be clarified with respect to country responsibilities for exchange rate adjustment. the fund ’ s role in the surveillance of the capital account and members ’ obligations in the surveillance process could also be better specified and resourced. bis central bankers ’ speeches c ) 4. transparent. an example is chile ’ s pre - announced buildup of foreign exchange reserves. measures should be consistent with the principles and should be peer reviewed. recognition of the responsibilities of capital - exporting countries to monitor the risks run by host institutions with respect to currency mismatches, maturity transformation and leverage. the financial stability board ’ s current initiatives for both the formal and shadow banking sectors are central in these regards. conclusion the shift to a multipolar economy is having a profound impact on capital flows and a broad range of relative prices, including