Address by Mr TT Mboweni, Governor of the South African Reserve Bank at the CEPR/ESI 11th Annual Conference on Global Imbalances, Competitiveness and Emerging Markets Pretoria, 28 September 2007  Distinguished delegates This is the eleventh year that representatives from the academic world and central banks across the world meet to discuss topics that are very relevant in the prevailing macroeconomic environment. On this occasion, the organisers have selected the issues of global imbalances, competitiveness and emerging markets. From the programme, it is clear that we can look forward to some interesting views and insights into these issues. In my keynote address, I will focus on a few aspects relating to central banks, in particular in emerging-market countries, and the challenges faced in formulating and implementing monetary policy in a globalised financial system characterised by imbalances. When referring to global imbalances, the most obvious ones that spring to mind are the US twin deficits and global trade imbalances, which have probably been the most publicised imbalances over recent years. Yet the world is characterised by many other imbalances. Some of these are embedded in the structure of the world economy as it has developed over the centuries, such as the income gaps between developed, underdeveloped and emerging-market countries. Others are more cyclical in nature. The current fallout in the US sub-prime market is an example of a reaction to a more cyclical imbalance caused by low interest rates, high liquidity and a general under-pricing of risk over recent years. Cyclical balances are normally restored through a combination of policy adjustments and market forces. However, this can be a painful process, as many financial institutions, investors and sub-prime mortgage lenders and borrowers that were directly affected by the recent events in global credit markets can bear witness to. Another example of a current cyclical imbalance is the extent of carry trades and build-up of long/short investment positions globally, which resulted from loose monetary policy in some countries and tighter policy in other countries, mostly emerging-market countries. This has enticed investors to borrow in the low-interest-rate currencies and invest in the high-yield currencies. Most cyclical imbalances result from the boom and bust characteristics of the global economy and financial markets. In his last speech, read on his behalf at the Jackson Hole Conference on 31 August 2007, the late Edward Gramlich had some interesting things to say about booms and busts. Essentially, he argued, American history showed that boom periods followed a pattern of initial discoveries, breakthroughs, widespread adoption, widespread investment, and then a collapse where prices cannot keep up and many investors lose a lot of money. In the bust that follows the boom, there is generally an overreaction, but after the dust clears investors emerge a little bit wiser and some of the benefits that led to the boom in the first place remain. The challenge to central banks, as well as to academic researchers, is to be able to see through the dust and noise of market talk, commentary, newspaper and television reports, speeches and comments by politicians and trade unions and many others with the interest of particular individuals or groups in mind. Instead, central banks need to make an effort to understand the processes that are underway and to apply the appropriate dose of policy measures, at the right time, for the longer-term benefit of the economy as a whole. This is much easier said than done. When considering the issue of global imbalances, one can imagine the world economy as a giant pendulum swinging to and fro. A stationary state of balance (what economists like to call equilibrium) never exists for very long, if at all. Indeed, Newton’s laws of motion, that for every action there is an equal an opposite reaction, can be equally well applied to the world of economics. A trend or event that pushes the economic pendulum to one side is usually cor