banks of major countries by way of various frameworks for international cooperation such as the g20. the first challenge ahead is from the imbalances in the real economy that we term “ global imbalances ”. these are the outcome of the combination of macroeconomic policy failure in major advanced countries and the savings gluts of emerging market countries. historically robert wade, “ from global imbalances to global reorganisations ”, cambridge journal of economics 2009, 33, 539 – 562 bis central bankers ’ speeches speaking, most financial crises have been largely attributable to similar imbalances in the real sector. to put it differently, we should be aware that in all financial crises, there are underlying real sector crises. unless we understand this correctly, we may end up with unintended consequences of having killed the messenger as the first way to deal with the crisis. there is a broad consensus that, if these global imbalances persist for a long time, the situation will develop into a global crisis or at least provide fertile soil for it. opinions, however, differ as to the train of causation. on the one hand, long - lasting monetary policy accommodativeness and sustained exchange rate imbalances are cited as the root cause of the global imbalances. others single out structural problems which will not be easily resolved any day soon, including the financial development gap between advanced countries and emerging market countries. under the current international financial system, global imbalances are highly likely to persist2 and, unless fresh and powerful proposal for their solution are soon put forward, the world economy may run the risk of lurching once again into a crisis of the global system. therefore, it is very important to form a strong and sustainable adjustment mechanism to resolve these global imbalances. the next challenge ahead is that, in the course of the transmission of the imbalances in the real economy to the financial sector, there is the growing likelihood of systemic risk being spread by a shock suffered by a single financial institution or market as financial interconnectedness is much greater than in the past. with the rapid deleveraging of financial institutions following the sub - prime crisis leading to fire sales of assets and the foreign exchange market turmoil, the us financial markets collapsed in a chain and innocent bystanders including korea, despite their sound fundamentals, experienced severe hardships due to abrupt capital outflows. consequently, an international consensus has been reached that policy

responses in mitigation are needed, in the case of emerging market countries, whose capital flow volatility is greater than that of advanced countries. for the advanced countries, net flow volatility is slight because capital outflows and inflows are mutually offsetting, despite the high volatility of certain types of capital flows. this is not the case for emerging countries for whom surges in capital flows are largely unidirectional with massive capital outflows taking place at the time of a crisis and capital inflows building up again after a crisis. 3 policy efforts to mitigate capital flow volatility are directed internationally toward expanding and tightening up global financial safety nets ( gfsn ) in forms such as currency swaps between central banks, expansion of the resources for financial support by international organizations, and the strengthening of regional financial cooperation. at an individual country level, they focus on strengthening policy responses to capital flows. a wide range of policy instruments are being tried out in many emerging market countries in the wake of the global financial crisis. measures in response and future tasks as i pointed out earlier, due to the heightened volatility of emerging market country capital flows, their central banks are hard put to come up with appropriate policy responses. since the overriding priority in policy responses should be placed upon ensuring domestic financial stability, it is absolutely vital to keep inflation expectations low and stable. to this end, serven, luis and ha nguyen ( 2010 ), “ global imbalances before and after the global crisis ”, policy research working paper 5354, world bank imf, world economic outlook ch4. ( 2011. 4 ) bis central bankers ’ speeches emerging market countries should implement sound macroeconomic policy as a matter of urgency. 4 at the g20 finance ministers and central bank governors ’ meeting held in paris in october, agreement was reached on coherent conclusions to guide the management of capital flows and on supporting the development and deepening of their bond markets to help emerging market countries cope effectively with capital flows. 5 major points on which agreement has been reached include that while macro - prudential policy autonomy is widely recognized, capital controls6 should be implemented only temporarily ; that emerging market countries ’ capital flow management measures and key - currency countries ’ domestic policies ( monetary policies ) should be subject to the imf ’ s surveillance ; and that it is important to call for emerging market countries to carry out gradual capital liberalization while recognizing the autonomy of their capital flow