to say a few words about the relationship between japan ’ s economy and monetary policy once deflation has finally been overcome. standard models analyzing monetary policy take the trend growth rate and the inflation rate in steady state as given and focus on economic fluctuations around the trend. the central interest of monetary policy analysis employing such models is how to smooth cyclical economic fluctuations and to stabilize the inflation rate near the target level. standard macroeconomic models generally make simplifying assumptions : short - term models focusing on business cycles take the potential growth rate as exogenously given, while long - term economic growth models examining the determinants of the potential growth rate ignore short - term economic fluctuations, since it is assumed that these are smoothed out over time and do not affect long - term economic growth. the pioneering study in this area is john b. taylor, “ discretion versus policy rules in practice, ” carnegierochester conference series on public policy, vol. 39, 1993, pp. 195 – 214. a standard textbook in this field is patrick bolton and mathias dewatripont, contract theory, the mit press, 2005. bis central bankers ’ speeches similar simplifying assumptions are made in the analysis of unconventional monetary policy. when unconventional monetary policies are analyzed using standard theoretical macroeconomic models, it is assumed that even if there is a shock large enough for interest rates to hit the zero lower bound the economy returns to its steady state as the shock dissipates. in other words, such analyses of unconventional monetary policies examine how the impact of a large shock is smoothed out and absorbed over time. however, if there is a downward shift in the steady state and the natural rate of interest, which reflects long - term growth expectations, shifts down permanently, the stimulative effects of a decline in real interest rates on economic activity will weaken and the effectiveness of monetary policy will be substantially hampered. moreover, if there is substantial uncertainty regarding the level of the natural rate of interest, this would make it difficult to assess the degree of monetary easing or tightening required and it would increase uncertainty over the future course of monetary policy. in addition, since the decline in the potential growth rate is likely to also lower expected permanent incomes, it will give rise to a negative income effect, which likely will exert downward pressure on economic activity. in fact, as seen in the “ secular stagnation ” debate of recent years, there has been active debate in major advance economies regarding the possibility that, following the large shocks

and upcoming electoral processes, both in advanced and emerging market economies, given their potential implications for global economic integration. as per some measures, economic policy uncertainty has continuously increased during 2018, although it is still below the historical maximum reached in 2016. 6 going forward, there is little doubt that external financial conditions faced by emdes are set to tighten further. obviously, projections for capital flows to these countries in the next couple of years are subject to a lot of uncertainty. however, recent estimates by the imf provide an idea of the challenges faced. according to this institution, portfolio inflows to emerging markets would decline by about usd 40 billion on average per year over 2018 - 2019 under a smooth fed normalization scenario, and by up to usd 60 billion if policy tightening were to be accompanied by a rise in risk aversion. 7 kutlina - dimitrova, z., and c. lakatos ( 2017 ) : “ the global costs of protectionism ”, world bank policy research working paper no. 8277, december. world bank ( 2018 ) : global economic prospects, june. this and other related indexes can be obtained from : http : / / www. policyuncertainty. com /. international monetary fund ( 2018 ) : global financial stability report, april. naturally, a substantial degree of heterogeneity underlies these projections, as global investors can be expected to differentiate amongst individual countries depending on the strength of their economic fundamentals. indeed, a number of emdes took advantage of benign conditions in international financial markets to move in this direction. however, it is also true that even for these economies the outlook may prove to be challenging in view of the following : a decompression of term premia in the united states may have important global ramifications, given their close correlation with those in other major advanced economies. a significant overvaluation of risky assets across a wide spectrum of market segments is observed. recent structural changes and rapid growth in the asset management industry may be leading to an underpricing of liquidity risks, increased interconnectedness and, in general, accentuate financial stability challenges. crossover investors not specialized in emerging economies have enlarged their presence in the markets for these countries ’ instruments, thereby increasing the potential for wide fluctuations in these assets ’ prices. for the already noted reasons, the balance of risks for the world economy is clearly tilted to the downside, especially in the medium and long terms