Prasarn Trairatvorakul: Regional trends for monetary policy and the
possibility of regional collaboration
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the
14th International Convention of the East Asian Economic Association (EAEA),
Chulalongkorn University, Bangkok, 2 November 2014.
* * *
Distinguished Guests,
Honorable Speakers,
Ladies and Gentlemen,
It is my pleasure and privilege to speak at the 14th International Convention of the East
Asian Economic Association. First of all, I would like to express my sincere gratitude to the
hosts for inviting me as a part of this esteemed forum, which brings together economists,
academics, and officials from all over the region.
Our countries have been overwhelmed by clouds of uncertainties in both domestic and
external fronts. So far, the question we have repeatedly asked ourselves is "What can 'WE'
contribute to sustain the recovery and better safeguard our economies?" And as "WE"
gather here today, I am confident that this is an opportunity for "US", to exchange knowledge
and experiences, that would greatly support the development of regional economies and
strengthen our regional cooperation.
Today, I would like to share my thoughts in pursuit of the answers to our question from a
policymaker's perspective. I will begin with what I see as the major contributors to the past
global financial crisis. Then I will touch upon the conduct of monetary policy amongst
Emerging Market Economies in response to the past crisis as well as its spillovers. Last but
not least, I will share my views on good policy preparations and highlight the importance of
policy collaborations, so that we, collectively, could better withstand the impact of the crisis
going forward.
Part I: Major developments that have contributed to the past global financial crisis
Ladies and Gentlemen, looking back on what we have experienced in the past decade, the
recent crisis has caused tremendous impacts with repercussions at the global level. On a
more positive side, however, the crisis has revealed three major developments in the
financial system, which have shaded some light on the inadequacy of existing policy
framework for our future preparations.
First is innovation, in response to the shift in the global financial system landscape. The
sophisticated financial instruments have been developed to serve rising demands from all
types of investors with different risk-return appetites. However, such a creation has resulted
in products that disguised the genuine financial risks. Moreover, systemic risk stemming
from complex nature of such products have led to increasing contagious consequences in
global economic and financial system.
Second is the institutional shift represented by an increasing role of non-banks and
shadow banks, especially in some Advanced Economies. This has long been a trade-off
for policymaking between economic and social considerations. On one hand, the
shadow banking sectors undoubtedly provide financial opportunity to those with limited
access. This institutional development also has encouraged higher competition in the
financial system, leading to greater efficiency. On the other hand, this informal financial
sector remains under-regulated and may incentivize risky activities, such as overleveraging,
which could become systemic and prone to produce adverse outcomes to the system.
The third development is what has taken the forefront role as an underlying driver of the
recent crisis and policies that follow. It is the increasing interconnectedness amongst
economies and financial markets. Rapid integration of international trade and finance has
led to promising economic prosperity. However, the increasing co-movements of business
and credit cycles globally also played an important part in amplifying and spreading
booms and busts cycles across the economies.
This new financial environment has set stage for possible negative impacts both in terms of
magnitude and depth on the real and financial sectors, especially those of the advanced
economies. To that extent, we have witnessed, the deployment of unconventional sets of
monetary policy instruments in order to shore up the economies and financial markets.
Part II: Responses to crisis and policy spillovers to EMEs: New trends of monetary
policy
Ladies and Gentlemen,
The implementation of the extra-ordinary policies and financial reforms in Advanced
Economies to tackle the crisis has generated momentous spillovers upon Emerging
Market Economies. These unintended effects are, mainly, (1) liquidity surge that drove up
financial market volatility and created significant demand for safe assets, and (2) regulatory
reforms in the financial system, mostly the banking sector, which raised the operating
costs of financial institutions amidst heightened risks in the financial system. Moreover, the
situation had worsened as it added to the direct impact of weakened global demand.
Although the spillover impacts to individual economies have been uneven, monetary policy
in most emerging markets have faced a tradeoff between achieving domestic
objectives and managing external spillovers. The limited and, in many cases, stretched
monetary policy tools have been designed to mitigate financial imbalance and vulnerability,
and to restore economic growth and maintain targeted inflation.
Our experiences from various Quantitative Easing (QE) episodes remind us that the
traditional monetary policy at hand may not be sufficient to address these multiple objectives.
Alongside policy interest rate as a primary tool, central banks in emerging markets have
additionally relied more on non-traditional, tools and measures. One is macro-prudential
policies, mostly related to real estate and the banking sector, to help address pockets of
vulnerability in the short-term. The other is a more market oriented approach by allowing
greater exchange rate flexibility to counter large and volatile capital flows.
Thus far, it is evident that emerging market economies have weathered such spillovers quite
well, but new challenges keep coming our way. Despite signs of recovery in some Advanced
Economies, their paths remain uneven. This called for the divergence of policy
implementations with substantial uncertainty, especially to financial market participants. Next,
the prolonged stagnation in some Advanced Economies has taken more tolls on emerging
economies as reflected by softening growth and heightening vulnerabilities. As such, "Policy
dilemma" in Emerging Market Economies is likely to become more pronounced,
especially as policy rate hikes from external front are imminent. Along the way, clear
and timely policy communications from Advanced Economies will be useful to prepare for
any adverse side-effects going forward.
Part III: Key policy takeaway and the importance of policy collaborations
Ladies and Gentlemen,
In preparation for upcoming challenges, policymakers wish to do better than passively
"catching up" with the crisis, but to be actively "ahead of the crisis" in order to prevent, or
at least, mitigate the impact should one occur. Against this backdrop, lines of policy
defenses for each economy have to be strengthened.
If we think of the economy as our own house, then keeping the house in order is always
an effective first line of defense. Strong economic fundamentals and macroeconomic
policy credibility would play a crucial role in ensuring confidence and the sustainable
economic activities. Nonetheless, increasing interconnectedness has made housekeeping
more difficult as it creates spillovers. To better deal with the shocks, broader set of policy
tools are called for. In a nutshell, sound macroeconomic policy and flexible macro-prudential
measures to target vulnerabilities have been employed to minimize unprecedented impact in
an appropriate and timely manner.
Nonetheless, these policies are reaching their limits, not only in terms of policy space
but also effectiveness. For a better solution, reforms in both the financial and real sectors
are essential. With effective reforms, the economy should better withstand shocks and reap
more benefits from increasing interconnectedness. It is worth noting that reforms are not
complementary, but rather a much needed action to unlock long-overdue potential
enhancements, especially on the production side. Additionally, financial reforms and
institutional adjustments to new regulations will lay a crucial foundation for efficient
management of systemic risks in the financial system.
Once our houses are kept in good order, one might hope that the stable global equilibrium
could be reached. [This is what Professor Taylor has dubbed as the "Nearly International
Cooperative Equilibrium" or NICE.] Nonetheless, with greater interconnections, keeping
one's house in order might only be the near-best equilibrium. It should go along with
enhancing cooperation in the international community. Long before this recent crisis,
Emerging Market Economies have been in the process of strengthening the cooperation in
both regional and global level. "Coordination" is essential and will facilitate policymakers in
staying ahead of the crisis.
In this light, international coordination, I believe, should provide three key policy elements;
Firstly, policy dialogue that would serve as a platform for discussions on
developments of risk scenarios, and sharing experiences to counter difficulties among
members. Such cooperation includes the Executive's Meeting of East Asia-Pacific Central
Banks (EMEAP), Bank for International Settlements (BIS), and International Monetary Fund
(IMF). These platforms have also provided channels for policymakers in the region to
communicate their policy conducts, which may also create spillovers to other members, so
that one could make the region being more cooperative.
Secondly, comprehensive preparations needed to better counter shocks. This includes
multilateral surveillance that provides better insights on the increasing
interconnectedness, through exposures of banks and corporates. For the East Asian
region, the ASEAN+3 Macroeconomic Research Office (AMRO) serves as a regional
surveillance unit to enhance its members' macro-monitoring systems. And to the global
extent, the International Monetary Fund (IMF) has introduced the early warning exercise and
cluster surveillance aiming at strengthening a country's capability to monitor tail-risks at a
more systemic and regional level.
And thirdly, swift and effective resolution including multi-layered liquidity provision. The
deepest layer within starts from the ASEAN Swap Arrangement (ASA), followed by the
Chiang Mai Initiative's Multilateralization (CMIM), and the liquidity provision from the IMF. Not
only will it provide safeguard for members, coordination under these collective actions will
also offer good will for global investors and enable them to quickly revive confidence, should
any shock occurs in the financial markets.
Final thoughts
Ladies and gentlemen, keeping our houses in order is the policymakers' usual business.
While economic and financial interconnectedness has become more sophisticated,
strengthening international coordination would be pivotal to success. This requires
extra effort in building stronger fences for global economic community to effectively handle
any unwanted shocks and new generation of crisis in the periods ahead.
Last but not least, I am confident that with knowledge and experiences sharing among us, we
will be a step closer to improve our role in promoting economic and financial stability. I do
see the enhancement of international cooperation as a seed towards success in policy
preparation for our region. I believe that, in the middle of a dark tunnel, with each of us
holding a torch focusing in the same direction, we could see better along the way and can be
sure that it is the right way out.
Thank you.