The post-Lehman era is on the way to becoming one of the longest recessions that the global economy has ever experienced. While common logic suggests that any recovery from a deep financial crisis will be both long and painful, there was still a widespread hope that the measures taken by policy-makers would have started to turn things around by now. But instead, the fragilities in the world economy just moved from the financial sector to sovereign balance sheets. Although the picture may seem bleak for the future, the lessons learned by these policy-makers could pave the way for a more resilient global economy in the years to come. The key thing to take away from the global crisis is the indispensable role of financial stability in addition to price stability for central banks.
Many emerging economies experienced a robust, demand-driven recovery soon after the onset of the crisis, while the recovery in advanced economies, more than three years after the Lehman Brothers collapse, is still fragile. However, during this period, low interest rate levels in advanced economies, together with the large-scale securities purchase programmes of major central banks, boosted short-term capital flows into emerging markets and exacerbated the imbalances in the pace of recovery between domestic and external demand in these economies, accumulating financial stability risks. These flows placed appreciation pressure on emerging market currencies while accelerating credit growth in emerging markets.