Dimitar Bogov: Policy nexus and the global environment - a new
consensus emerging from the crisis?
Address by Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia,
at the 2nd Research Conference "Policy nexus and the global environment - a new
consensus emerging from the crisis?", Skopje, 26 April 2013.
* * *
Ladies and Gentlemen,
Dear guests,
Let me wish you welcome on our second Research Conference that we usually organize on
the day of the monetary independence anniversary of the Republic of Macedonia. The
subject of this year's conference we believe is highly topical, in line with the ongoing lively
discussions among central bankers, research and academic institutions worldwide.
The global economy in the last couple of years undergone remarkable changes, both from
institutional and policy design setup. We witnessed financial market turbulences, banks
failures and sovereign debt crisis with strong contagion around the world economy that was
almost unique by its size, and the global economy is still struggling to recover. After five
years of global crisis we could say that we experienced a lot, and hopefully, we learnt a lot.
One of the main lessons of the crisis was exactly related to the topic of the conference - the
need of policy nexus as a kind of a consensus emerging from the crisis.
What is the policy nexus about?
At the initial stage of the financial crisis the importance of the macro prudential policies in the
overall policy mix was highlighted and therefore, a lot of attention has been put on the
monetary and macro prudential policy nexus, conveying the main message that the price
stability and financial stability are interconnected. With the appearance of the sovereign debt
and banking crisis in the last couple of years in the euro area, it was quite obvious that the
poor public finances management could also impose threats to the financial system. The
financial instability and weak public finances can potentially have adverse effects on the
financial markets, imposing distortions in the monetary policy transmission mechanism, and
resulting in serious macroeconomic imbalances. The required policy nexus is becoming a
necessary precondition for designing and implementing a sound macroeconomic
management.
Under situation that was more specific than usual, when the role of traditional instruments
was limited, the monetary policy turned to unconventional policy measures. Although the
monetary policy in the region has not been constrained by zero lower bound on interest
rates, the central banks also turned towards unconventional monetary policy tools, having in
mind the potential risks of repeated deterioration of the external imbalances and inflationary
pressures or aiming at supporting other objectives (including credit growth). While listing the
experiences of unconventional measures among the central banks, we can distinguish
between: measures for increasing and changing the composition of the assets in the balance
sheet of the central banks in different forms and with high heterogeneity across the countries,
and measures for influencing agents' expectations by strong commitment by the central
banks for keeping low interest rate for a longer time horizon.
In the public finances domain, the strengthening of fiscal discipline and the need of careful
monitoring of fiscal sustainability can be taken as the core preventing arms against fiscal
imbalances that highlight this crisis. The fiscal consolidation is already on the list of
objectives within the EU and it will require serious efforts and internal adjustments for
reaching this goal. In the midstream of the crisis, the need of fiscal adjustment imposed the
confronting issue of the adverse impact over recovery and growth dynamics that was really
one of the tight spot in the crisis management. The fiscal stimulus obviously supported the
recovery in the countries where there was a room for it, but looking forward, the need for
fiscal consolidation should be taken seriously.
The financial stability, not only nationwide, but also in international framework, is quite often
quoted as a common good. Attention should be paid to the risk distribution among financial
institutions, as well as to the aggregate risk level evolution. The regulatory response to the
crisis was oriented towards strengthening the banks' soundness as well as designing
treatment of systemically important banks which certainly require a special attention by the
authorities. Systemic risk requires systemic and comprehensive solutions, including changes
in the institutional setup. In the EU it was done by establishing crisis management
mechanisms, strengthened governance aimed to monitor and prevent against any
macroeconomic imbalances, as well as to move towards the banking union. The EU member
states and institutions face many challenges when making the new institutional setup
operational and when making the necessary adjustments in a reasonable time framework. In
addition, all other countries face the challenge of converting the lessons from the crisis into
policy actions.
The changing role of central banks
During the crisis, the role of the central banks moved from traditional way of monetary policy
implementation towards combining the monetary and financial stability objectives, both being
complementary components of macroeconomic stability. The set of instruments became
more complex because of the unconventional measures, designed to bridge the period of
extraordinary circumstances affecting the effectiveness of standard instruments, and aiming
to strengthen the financial stability or economic recovery. Due to the variety of those
unconventional measures across the countries, it is still difficult to assess their impact,
although the experiences of countries could confirm the quite largely accepted consensus
that the "monetary stimulus" really supported the economy. However, we should be aware
that at one point in the future their contribution will be overwhelmed and we will need to take
appropriate action on time in order to impede any reverse effects.
In the policy design and decision making process under the current dynamic environment,
the strengthening of analytical tools and the enhancement of knowledge on the policy nexus
are extremely important. The interplay of monetary, fiscal and macro prudential policies is a
quite new area, seeking for deeper research work to support the decision making process at
the central banks and other policy makers, to provide appropriate advices and policy
recommendation and therefore, to prevent from underlying risks. The aim of our conference
is to contribute towards building knowledge and exchanging views on the policy nexus issue.
Having in mind the quality of papers that are going to be presented today, I truly hope that
we will make our contribution towards this aim.
I wish you a successful conference and fruitful discussion!
Thank you.