That tiny misalignment.

Richard Nixon s treasury secretary, John Connally, once told a group of European leaders that while the dollar was America s currency, its misalignment was Europe s problem. Today, the misalignment of the dollar and the euro against the renminbi and other Asian currencies is increasingly becoming Asia s problem.

Of course, reconciling the fundamental misalignment of interests in China will not be easy not least because interest groups will not discuss, much less oppose, reforms in an open and transparent manner. Instead, they argue that the reforms are too risky or purge their substantive provisions.

True, there are times when particular countries currencies can be judged to be undervalued or overvalued, and there are times when their trading partners have a legitimate interest in raising the issue. But even when currency misalignment is relatively clear, trade agreements are not the right way to address it.

What central banks need now is a revised mandate that upholds price stability as the primary, long term objective, while allowing policymakers to pursue other objectives when appropriate. Specifically, the central bank should be able to move slowly on price stability if it regards the real economy as unacceptably weak, or if an asset price misalignment threatens financial stability and cannot be defused quickly by the new macro prudential instruments.

However, over this period the UK also experienced sustained exchange rate misalignment, which the BoE s Monetary Policy Committee was unwilling or unable to address within its existing mandate. The MPC also failed to respond to any of the three bouts of rapid growth in house prices that preceded the financial crisis, arguing that they were structural in nature caused by the decline in inflation and interest rates since the 1980 s so a monetary response was not appropriate.