appear to be exaggerated relative to or seemingly unrelated to changes in fundamentals. do cross - border capital flows reduce the effectiveness of monetary policy? one of the dimensions of increased openness is the rapid increase in the volume of cross - border capital flows. if foreign and domestic securities are perfect substitutes, the liberalization of cross - border financial transactions could, in principle, result in a single world financial market. this might appear to imply that the interest rate at which citizens and governments of a nation could borrow and lend would then be set on world markets, with little or at least limited influence by national policymakers. a small country, for example, would have no ability to influence world interest rates in this case. a very large country, such as the u. s., would retain some influence, but the influence would be diminished relative to the closed - economy case and would result from its ability to affect the world interest rate. if a country ’ s exchange rate is pegged to the currency of another country ( or countries ), then its interest rates will move closely in line with those in the country or group of countries to which it is pegged. but for countries with flexible exchange rates, domestic interest rates can move quite independently of interest rates abroad. however, if countries care about the level of their exchange rates, which have implications for aggregate demand and inflation, and adjust monetary policy accordingly, interest rates will, to a degree, move in common across countries. greater integration of global capital markets does in fact mean that expected returns for holding different assets, with appropriate compensation for differences in risk, should increasingly converge. however, as long as exchange rates can adjust, this does not imply that interest rates across countries must move together. instead, it is movements in exchange rates which insure convergence of holding period yields across the countries. before turning to the connection between interest rates and exchange rates, let me note that the evidence does not confirm an increase in correlations in interest rate movements across world asset markets, at least in the 1990s compared to the 1980s. it is true that the levels of long - term interest rates in major industrial countries have tended to converge since the early 1980s. but this is largely accounted for by a convergence of inflation rates. on the other hand, there is little evidence to suggest that correlations between changes in long - term interest rates across these countries have increased over this period. these correlations are a little higher in the 1980s and 1990s than they were in the 1970s,

begin by considering how to promote solvency and liquidity, taking into account the unique structures and activities of each type of nonbank. liquidity challenges vary across nonbank firms and activities. in some, the issue is whether a firm can fund itself in a distressed situation. for example, a broker - dealer that relies heavily on short - term wholesale funding may find its funding evaporating at the first sign of trouble – a situation that could force the sale of assets at fire sale prices. one way to mitigate such problems is by having direct restrictions on the structure of liabilities, such as on their duration or on the use of wholesale funding. analogously with banks, one could also imagine requiring some nonbanks to maintain buffers of highly liquid assets that are sized according to the risk that their liabilities will run off quickly in a stress situation. in other nonbanks, withdrawable liabilities are part of the structure of the entity or activity, and what varies is the degree of mismatch between the liquidity of assets and liabilities. for example, some open - ended mutual funds offer daily withdrawal privileges but invest in assets that take longer to sell and settle, giving investors an incentive to withdraw quickly when distress arises. the fire sales of assets that may result can depress asset prices and increase volatility, with knock - on effects on other institutions and markets. concerns have grown about this liquidity mismatch as the aggregate value of less liquid assets in such funds has grown. in part because of this concern, in a december federal register notice last year, the financial stability oversight council ( fsoc ) requested public comment on potential systemic risks posed by asset manager activities and products. to promote solvency, one could impose ratio - type capital requirements, such as leverage ratio requirements or risk - based requirements. an alternative is to require that firms perform regular stress tests to demonstrate that they can remain solvent and continue to lend even under stress. in the fed ’ s case, it has chosen to impose all of these requirements on banks, but these requirements cannot simply be applied, as is, to nonbanks. see gorton and metrick, “ securitized banking, ” in note 4, op. cit. ; jeremy stein ( 2012 ), “ monetary policy as financial stability regulation, ” quarterly journal of economics, vol. 127, pp. 57 – 95 ; robin greenwood, samuel hanson, and jeremy stein ( 2014 ), “ a