these policies are prolonged long beyond repairing markets – and there the benefits are much less clear. let me list 4 concerns : 1. is ump the right tool once the immediate crisis is over? does it distort behavior and activity so as to stand in the way of recovery? 2. do such policies buy time or does the belief that the central bank is taking responsibility prevent other, more appropriate, policies from being implemented? put differently, when central bankers say, however reluctantly, that they are the only game in town, do they become the only game in town? 3. will exit from unconventional policies be easy? bis central bankers ’ speeches 4. what are the spillovers from such policies to other countries? for reasons of time, let me focus on the last two. exit the macroeconomic argument for prolonged unconventional policy in industrial countries is that it has low costs, provided inflation stays quiescent. hence it is worth pursuing, even if the benefits are uncertain. central bankers such as governor stein have, however, raised concerns about financial sector risks that may build with prolonged use of unconventional policy. one reason is that leverage may increase both in the financial sector and amongst borrowers as policy stays accommodative. one channel seems to be that a boost to asset liquidity leads lenders to believe that asset sales will backstop loan recovery, leading them to increase loan to value ratios. when liquidity tightens, though, too many lenders rely on asset sales, causing asset prices and loan recovery to plummet. because lenders do not account for the effects of their lending on the “ fire sale ” price, and subsequently on lending by others, they may have an excessive incentive to build leverage. leverage need not be the sole reason why exit may be volatile after prolonged unconventional policy. as feroli et. al. argue, investment managers may fear underperforming relative to others. this means they will hold a risky asset only if it promises a risk premium ( over safe assets ) that makes them confident they will not underperform holding it. a lower path of expected returns on the safe asset makes it easier for the risky asset to meet the required risk premium, and indeed draws more investment managers to buy it – the more credible the forward guidance on “ low for long ”, the more the risk taking. however, as investment managers crowd into the risky asset, the likelihood of possible fire sales increases if the interest rate environment turns. everyone may dump the

risky asset at that point in order to avoid being the last one holding it. ideally, market players would exit trades gradually, and asset prices would fall gently, as probabilities of the interest rate environment turning increase. but a rise in long rates may upset an incipient recovery. the central bank ’ s attempt, however, to hold long rates down till the last possible moment by reassuring markets that policy rate hikes are a long way away, is not without danger. if economic data turn up strongly, its reassurance may not carry credibility, and market players will exit trades en masse. leverage and investor crowding may therefore exacerbate the consequences of exit. the consequences of exit, however, are not just felt domestically, they could be experienced internationally. spillovers perhaps most vulnerable to the increased risk - taking in this integrated world are countries across the border. when monetary policy in large countries is extremely and unconventionally accommodative, capital flows into recipient countries tend to increase local leverage ; this is not just due to the direct effect of cross - border banking flows but also the indirect effect, as the appreciating exchange rate and rising asset prices, especially of real estate, make it seem that borrowers have more equity than they really have. exchange rate flexibility in recipient countries, in these circumstances, sometimes exacerbates booms rather than slowing inflows. recipient countries should adjust, of course, but credit and flows mask the magnitude and timing of needed adjustment. for instance, higher collections from property taxes on new bis central bankers ’ speeches houses and income taxes on a more prosperous financial sector may suggest a country ’ s fiscal house is in order, even while low risk premia on sovereign debt add to the sense of calm. at the same time, an appreciating nominal exchange rate may also keep down inflation. so when source countries move to exit unconventional policies, some recipient countries are leveraged, imbalanced, and vulnerable to capital outflows. recipient countries are not being irrational when they protest both the initiation of unconventional policy as well as an exit whose pace is driven solely by conditions in the source country. having become more vulnerable because of leverage and crowding, recipient countries may call for an exit whose pace and timing is responsive, at least in part, to conditions they face. the case for international monetary policy coordination hence, my call for more coordination in monetary policy. i do not mean that central bankers sit around