Juyeol Lee: Challenges faced by small open economies and the
appropriate monetary policy responses
Opening address by Mr Juyeol Lee, Governor of the Bank of Korea, at the BOK-KIEP-PIIE
Conference, jointly hosted by the Bank of Korea, Korea Institute for International Economic
Policy, and the Peterson Institute for International Economics, Seoul, 19 July 2016.
* * *
Good morning,
Distinguished guests, Ladies and gentlemen!
I am delighted to welcome you all today to this conference, jointly hosted by the Bank of
Korea, Korea Institute for International Economic Policy, and Peterson Institute for
International Economics. Let me begin by expressing my special thanks to our conference
co-hosts, President Adam Posen of the Peterson Institute for International Economics and
President Jung Taik Hyun of the Korea Institute for International Economic Policy; and to the
panelists, Swiss National Bank Governor Thomas Jordan and Bank of Israel Governor Karnit
Flug; and to Professor Olivier Blanchard. I would also like to express my sincere appreciation
to all of the session speakers, moderators, and discussants for their contributions to this
conference.
As the global economy has become more integrated, the external effects of changes in the
economic conditions and monetary policies of major countries have become greater than
ever before. These effects are greater particularly in small open economies like Korea. And
so I am very pleased that this conference, co-hosted by two outstanding think tanks in the
area of international economics, provides an opportunity to discuss the challenges faced by
small open economies and the appropriate monetary policy responses.
In the years since the global financial crisis, major economies have been implementing
accommodative macroeconomic policy to cope with their economic sluggishness. However,
most of them have failed to emerge from their low growth trends, due mainly to structural
factors. In addition, the international financial markets are showing higher volatility, owing to
uncertainty surrounding monetary policy normalization by the US Federal Reserve and the
possibility of a recurrence of financial and economic unrest in emerging countries, combined
with the UK's Brexit decision.
Small open economies are influenced greatly by the economic situations of major countries
and international financial market conditions. In terms of their real economies they are
experiencing economic slowdowns in line with sluggish exports. On the financial side, they
are seeing high volatility in capital flows and price variables, such as exchange rates.
All of this makes for a complicated policy environment for the central banks of small open
economies. They have to support economic recovery, while at the same time responding to
mounting uncertainties in the financial markets stemming from external shocks. So with this
background in mind, allow me to share my views on the policy tasks small open economies
have to deal with.
First, in our conduct of monetary policy we should pay special attention to financial stability
risks, while supporting the recovery of economic growth. We should maintain our
accommodative monetary policy stances to ensure that the trend of low growth does not
become entrenched. Yet at the same time, we must ensure that this does not undermine
financial stability. Especially in the case of small open economies, we need to bear in mind
that, if the degree of monetary easing is excessive, the risk that external shocks would trigger
sudden capital outflows and currency depreciation is relatively higher.
Second, we should strengthen our efforts to reduce the negative impacts of overseas factors
on domestic financial stability and economic growth. Since the global financial crisis, many
countries have taken various steps to enhance their capacities to cope with external risks, for
example by strengthening macroprudential policies, improving exchange rate flexibility and
increasing their foreign reserves. At an international level, they have implemented the
Basel III framework and strengthened regulations on G-SIFIs, in an effort to heighten the
resilience of financial institutions to external shocks and improve the shock absorption
capacities of their financial systems. Through this conference, I hope that we can share what
we have achieved with these policies and what we have learned from them. I also hope that
we can come up with new supplementary measures.
Third, we need to continue to pursue international cooperation to expand financial safety
nets. They have been steadily improved at both the global and regional levels, with the
establishment of the IMF's New Arrangements to Borrow, the conclusion of US dollar
currency swap arrangements between major countries, and the increase in the Chiang Mai
Initiative Multilateralisation(CMIM) fund. Going forward, we should continue our efforts on
international cooperation for stronger global financial safety nets. To this end, we need to
promote cooperation between the IMF and regional financial arrangements such as the
European Stability Mechanism and CMIM, and expand international currency swap
arrangements.
Finally, I would like to emphasize the necessity of structural reform. During the global
financial crisis, and even after the crisis, we have witnessed numerous instances in which
countries with strong economic fundamentals rapidly overcame external shocks. A great deal
of research shows that structural reform involves difficulties in the short term, but in the
medium and long term, it enhances the efficiency of resource allocation and accordingly has
positive impacts on employment and economic growth. And if economic resilience is
strengthened by structural reform, we can avoid excessively accommodative macroeconomic
policy and thereby minimize its negative side effects.
Ladies and gentlemen,
I have talked about the challenges and policy tasks that small open economies currently
face. It seems that monetary policy measures alone cannot resolve these multi-faceted
difficulties. I would stress that we need to pursue efficient mixes of monetary,
macroprudential and structural reform policies, as well as strive for international cooperation.
I hope that today's conference serves as an excellent venue for lively discussion and the free
exchange of ideas regarding how to address these challenges.
Thank you.