way to low, stable, and predictable inflation, and inflation expectations are firmly anchored. we both approach the inflation target in a symmetrical way. this helps to smooth the ups and downs of the business cycle and, more generally, has led to stronger economic growth in the long term. how does inflation targeting help in the context of today's global economy? first of all, by reducing uncertainty about the future value of money, a climate of low and stable inflation maximizes the clarity of signals that are sent by prices. this helps businesses to make appropriate investments. further, central banks pursue inflation targeting by adjusting interest rates with the goal of keeping total supply and demand in the economy in rough balance. in doing so, monetary policy can make it easier for resources to shift from sector to sector. this is particularly important in times such as these, when large swings in relative prices highlight the need for rapid adjustments in economic activity. one of these relative prices is the exchange rate. a flexible exchange rate is very useful because it helps the economy adjust to shocks, especially external shocks that affect different economies in different ways. but large movements in the exchange rate can pose difficulties for particular sectors. and it can be harder for policy - makers to keep following the right policies when some important economies are seen to be circumventing what could be called " the rules of the game. " the right international policies i'll come back to this point, and discuss the international financial system in just a moment. but first, let me say a few words about international trade. our reliance on international trade means that both chile and canada have a particular interest in promoting the free flow of goods and services. all countries should be working to push the doha round of multilateral trade negotiations to a successful conclusion and to strengthen the world trade organization in order to ensure proper compliance with the rules of trade. and policy - makers need to be vocal in resisting calls for protectionism. unfortunately, progress on trade appears to be stalled, and protectionism is a real and rising threat. the calls for protectionist action are, perhaps, a natural by - product of today's globalized economy. as the world economy has developed, domestic firms have found themselves having to adjust to global forces much more quickly than in the past. with the globalization of markets has come intense competition in many sectors. without question, this globalized economy has brought tremendous benefits to our citizens. but in the face of competition, policy - makers have heard calls to

of liquidity into the global economy. clearly, this liquidity helped to encourage the strong growth of recent years. but now, central banks are in the process of removing some of it. the interest rate increases seen to date, and the prospects for more increases to come in some countries, have been associated with somewhat increased volatility in financial markets, as investors adjust their expectations about future growth. this withdrawal of liquidity is completely appropriate, given that the global economy is now likely not too far away from the limits of its capacity. thus, it seems very likely that global growth will slow to a more sustainable pace. ideally, this would take place in a relatively smooth way. but there are a number of risks surrounding this scenario, and there is a possibility that global growth will slow more sharply than desired, to the detriment of our two economies. the most important risk has to do with the way global imbalances are ultimately resolved. there are a couple of concerns here. first, in order to reduce its current account deficit to sustainable levels, the u. s. economy needs to reduce its domestic demand. but as i mentioned, u. s. demand has been a key support for the global economy. so it is crucial that other major players boost their domestic demand to pick up the slack. specifically, it is important that china and the economies of emerging asia take steps to reduce their savings by strengthening household demand. it is also important that demand in europe and japan continue to strengthen, to help global economic growth smoothly " rotate " away from the united states without global demand slowing too much or too quickly. it is crucial that financial markets remain confident that policy - makers are serious about putting the right policies in place to allow for an orderly resolution of imbalances. as long as they have this confidence, financial markets are likely to continue to function smoothly. but my main concern is that if we don't make more progress in implementing the right policies, then we run an increased risk of global financial instability. and such instability could then spill over into trade in goods and services, leading to a dramatic decline in global growth. so, what are the right policies? this will be the subject of the rest of my remarks. let me begin by looking at this question from the perspective of domestic policies before turning to international issues. the right domestic policies my counterpart at the banco central de chile, vittorio corbo, spoke at a conference on central banks and global imbalances