Economists expect high levels of global growth to continue, but inflation could also increase, the Bank for International Settlements (BIS) said in its annual report on Sunday.
Other risks include a stronger-than-expected US slowdown and large and volatile capital flows stemming from global imbalances, said the report by the BIS, known as the central bankers' central bank.
One vulnerability is that financial market reaction to good news may "have become irrationally exuberant," which would eventually reverse if fundamentals are overpriced, the report said. Tighter monetary policy may be the best preventive medicine.
"The principal argument for tightening monetary policy in the upswing is to moderate the excesses in economic and financial behavior," the BIS said.
The report said policymakers should watch more than inflation because previous shocks -- such as the Great Depression in the 1930s, Japan's crisis in the early 1990s and the Asian financial crisis in the late 1990s -- occurred in periods of low inflation.
"In fact, each downturn was preceded by a period of noninflationary growth exuberant enough to lead many commentators to suggest that a `new era' had arrived," it said.
Global inflation appears possible, the report said.
"Inflation pressures globally seem to be increasing, while evidence of various imbalances continues to mount everywhere," it said.
Countries with large current account deficits should bear "a particular responsibility" for moderating global demand and could benefit from further fiscal consolidation, the report said, without naming any country.
But it said: "Those who are concerned about imbalances and resource misallocations would note that China seems to have a particularly large gap between actual interest rates and the `normal' rate determined by the economy's potential growth rate."
With strong credit expansion, rising asset prices and massive investment in heavy industry, the Chinese economy is demonstrating "disquieting symptoms."
There "should also be a greater willingness to let the renminbi [yuan] rise," though this would present formidable challenges to Chinese authorities, it said.
The report also said "there is clearly something anomalous in the ongoing decline in the external value of the yen" and that tighter monetary policy in Japan could help.
Managing director Malcolm Knight told reporters: "Containing inflationary pressures seems to require further tightening in most jurisdictions, as is expected by financial markets and reflected in long-term real bond yield."
"Access to credit remains easy, and credit spreads are at record lows," Knight said.
Knight declined to comment on current exchange-rate levels of the euro, but he noted that the monetary policy of the European Central Bank appears "entirely appropriate" given the importance of the euro zone economy.
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