banks, to significantly depart from prevailing policy rates if their main objective is to respond to an exogenous and general increase in demand for central bank balances. in the future, monetary policy may have to be adjusted, not for the purpose of easing financial tensions, but according to its own objective and in view of the state of the economy. as regards the euro area, the governing council has judged that, in the current uncertain environment, it was appropriate to gather additional information before drawing conclusions for monetary policy, although the overall stance is “ still on the accommodative side ” and … “ the medium - term outlook for price stability remains subject to upside risks ”. looking further ahead, difficulties in the subprime mortgage markets combined with the generalized securitization of loans will lead to losses whose localization in the financial system remains undetermined. this information problem is currently creating uncertainty and optimal choice of monetary policy instruments in a simple stochastic macro model ; the quarterly journal of economics vol. 84, no. 2 ( may, 1970 ) turmoil. however, things should be put in perspective. available data indicate that, unless the economy unexpectedly deteriorates, those losses will remain small in comparison to total available capital in the financial system and should be easily absorbed. of course, conditions remain fragile in many segments of the capital markets. perverse dynamics may always develop. by acting to restore balance and stability in the interbank market, central banks are just doing their job.

financial crisis, banking flows retrenched the most, followed by debt portfolio flows. 7 portfolio equity flows have been much more resilient than debt flows, which have halved between the pre - and the postcrisis periods. the resilience of equity flows shows that they have better risk - sharing properties than debt. 8 so, even though important measures are taken to reduce trade balances ( sometimes at a high cost ), the way these current account deficits have been financed continues to impact current and future current account imbalances, thus limiting the efficiency of demand rebalancing. valuation effects and income flows are increasingly driving net external positions, more than the trade balance itself [ slide 10 ]. this implies keeping a close eye on the types of financial flows which finance current account imbalances, and watching out for the relative contribution of fdi, equity, debt and banking flows to the build - up of external imbalances as well as the exchange rate exposure both on assets and liabilities. 3. so what are the possible policy responses to limit excessive global imbalances? let me start by stressing what the non - adequate responses are. first, protectionism is a temptation but it is not an option. from a macroeconomic point of view, an increase in protectionism is recessionary and inflationary, acting as a negative supply shock. furthermore, as the current account is determined by the balance between savings and investment, there is no clear evidence that trade policies are likely to affect both variables. for example, due to the increasing integration of global value chains, any increase in tariffs on imported inputs immediately translates into higher production costs, thus undermining export competitiveness. so, imposing new trade barriers – or “ bilateral deals ” – on some trade partners not only has almost no chance of eliminating the overall current account deficit, but it also threatens long - run economic growth. alternatively, it would also be misleading for countries to carry out non - cooperative domestic macroeconomic policies. competitive devaluations first : after some unilateral and unfortunate declarations last week, several of us on the governing council of the ecb felt the need to reiterate that during the last imf annual meetings in dc last october we committed with all our partners to a multilateral approach saying that, i quote, “ we will not target our exchange rates for competitive purposes ”. any deviation from this common rule would be at the cost of breaking mutual trust