Juyeol Lee: Opening address - 2018 Bank of Korea International
Conference
Speech by Mr Juyeol Lee, Governor of the Bank of Korea, at the 2018 Bank of Korea International
Conference, Seoul, 4 June 2018.
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Ladies and gentlemen,
It is a pleasure for me to bid a warm welcome to you all, to the 2018 Bank of Korea International
Conference. I would like to express my sincerest gratitude to Professor Robert Hall, of Stanford
University, and Masaaki Shirakawa, former Governor of the Bank of Japan, who will deliver
keynote speeches this morning, and to all of our distinguished moderators, speakers and
discussants. Let me also say how deeply I appreciate the invaluable contributions of Professor
Thomas Sargent to this conference, all the way from the planning stage.
This year marks a decade since the Global Financial Crisis upon the failure of Lehman Brothers.
The global economy suffered the worst crisis since the Great Depression of the 1930s, and was
long unable to recover from the recession that followed. Fortunately, the global economy is now
reemerging from the aftermaths of the crisis: growth has gained momentum, and the markets
have stabilized. This is a result of many countries' work in cooperation to make their financial
systems more stable. It is also due to their unprecedentedly bold and active monetary policies to
support the recovery.
Central banks are now working to normalize the post-crisis policies. The environment for
monetary policy has also changed significantly from the one prior to the crisis. In this differing
environment, therefore, we have inevitably come to a position to consider how to perform our
existing roles, as well as whether there are any new roles demanded to us.
Let me start by talking about some of these changes in the monetary policy environment facing
many central banks today, and about the policy concerns arising from them.
First are the concerns about the changing slope of the Phillips Curve. Prior to the crisis, a fall in
unemployment during recovery tended to result in a rise in inflation: that is, the Phillips Curve
used to slope downward in the short-run. However, we are now having doubts about this
relationship, hence are facing difficulties in deciding the policy.
Secondly, there are concerns that the neutral rate of interest-an important guiding measure for
policy stance-may have fallen significantly. A lower neutral interest rate means that we have
smaller room for policy rate cuts in face of the economic downturn. It makes the interest rate
more likely to reach its lower bound, making it difficult for us to address business cycles.
Furthermore, the neutral rate may continue to stay low, due to the long-term factors such as
population aging, declining productivity and increasing preference for safe assets.
Thirdly, we now need to consider outward spill-overs of one's monetary policy, together with the
"spill-backs" to one's own economy. Countries now have closer trade and financial relations than
ever, so that the impact of major economies' policies on international financial markets and the
world economy comes back to influence themselves. For instance, we saw in 2013 during the
Taper Tantrum that the Fed's signal to change its monetary policy stance caused sudden capital
outflows from emerging economies and global financial market unrest. Recently also, the US
interest rate hikes and the stronger US dollar have contributed to financial unrest in some
emerging economies. As advanced economies normalize their monetary policies going forward,
these sudden capital outflows and market unrest can recur at any time.
These changes in the monetary policy conditions pose challenges shared by many countries.
Across the world, we see considerable amount of ongoing discussion about how central banks
should respond. Hoping to see a similarly valuable discussion in this conference, I would like to
make a few remarks.
First of all, we will have to find ways to keep monetary policy effective even in this new
environment. When central banks in advanced economies saw policy rates reach the zero lower
bound, they mobilized a variety of unconventional measures. We yet need further research that
details the conditions for successful large-scale asset purchases, forward guidance and
negative interest rates, as well as their long-term effects. We also need to talk about whether
countries other than those with a key currency can use such unconventional measures as part of
the monetary policy toolkit, and if not, about what are their policy alternatives.
Moreover, to keep our policies effective, we will have to work even further on communication.
People feel greater uncertainty about our policies as both the policy environment and the
responses are changing, possibly making our monetary policy less effective and less credible.
Central banks need to communicate their policies more actively to reduce these uncertainties
and manage peoples' expectations. We also need to think about how we can do so more
efficiently, given today's widespread use of online and social media.
Additionally, we need to realize the limitations of monetary policy and actively pursue a proper
policy mix. In general, government spending does not crowd out demand by much during
demand slowdowns as it did not, for example, right after the financial crisis, so that an expansive
fiscal policy together with accommodative monetary policy can achieve macroeconomic stability
more effectively. Macroprudential policy is crucial as well. In a low-growth low-inflation
environment, financial imbalances are likely to build up as the monetary policy tends to mainly
aim at economic recovery. To secure financial stability -another important goal of monetary
policy-it is indispensable to coordinate monetary policy with macroprudential policy.
Honored guests, Ladies and Gentlemen!
Due to the recent changes in economic structures and financial environment, our monetary
policy is facing new challenges never experienced before. I look forward to seeing here-through
the active exchange of your views for two days-many policy options proposed to help overcome
the challenges that monetary policy is facing. And I hope that all of us, at the end of the
conference, will have gained some profound insights about how central banks will continue to
evolve into the future.
Thank you.