Choongsoo Kim: Monetary and macroprudential policies in the aftermath
of the crisis
Opening remarks by Mr Choongsoo Kim, Governor of the Bank of Korea, at the Bank of
Korea International Conference 2012 "Monetary and Macroprudential Policies in the
Aftermath of the Crisis" co-organized with the IMF, Seoul, 14-15 June 2012.
* * *
Good morning.
Distinguished speakers, participants.
I bid you all a very warm welcome to the 2012 Bank of Korea International Conference. In
particular, I would like to express my gratitude to Professors Thomas Sargent, Barry
Eichengreen, and Yung Chul Park, Dr. Jonathan Ostry, and all of our speakers and
participants for their invaluable contributions to this conference. My special thanks go as well
to the IMF, our conference co-host.
I am confident that this conference will provide us with an excellent forum for discussing the
valuable precepts drawn from the global financial crisis, and sharing ideas in the face of risks
and challenges in the years ahead. Since the outbreak of the global crisis, policy community
and academia in the global world have brought their minds to bear on the question of how
the crisis arose and proposals for its resolution.
Although I am sure that these efforts need to be continued, especially so amid the sovereign
debt crises in the eurozone, it is never too early to start the discussion of what direction of
monetary policy should follow in the future.
Crises are the surface manifestation of important underlying imbalances. There is no doubt
that financial and real imbalances played major roles in causing the crisis and worsening its
severity. We should, however, acknowledge that a big gap between reality and our
perception of it sowed the seeds of the crisis. We need, therefore, to reset our understanding
of the real economy and the financial system.
In fact, this has been how our predecessors overcome the economic crisis of the 20th
century. The Great Depression changed the world as they knew it, and put their knowledge
and ideas to the test. But, they were willing and brave enough to revise their views and
beliefs to lay the foundation of new framework - "macro" economics.
A crisis is accompanied by severe strains. But, at the same time, it offers an opportunity to
broaden our understanding. If we can come up with a new framework that will last for
decades or longer, we will be similarly remembered as another generation of economists and
central bankers that overcame the previous orthodoxy to turn the crisis into the beginning of
a new era.
Taking the opportunity given me here today, I would like to address several critical issues
related to future monetary and macro-prudential policy, and to say a few words about
strengthening global cooperation to achieve financial stability.
Global financial crisis and monetary policy
The global financial crisis, as we all know, started in the financial sector but has eventually
led to fiscal crises in many advanced economies, not to mention a global recession.
In response to the crisis, central banks around the world undertook a wide range of
measures. Policy rates were cut swiftly, and non-conventional measures were also deployed
including, among others, large-scale term-loans to troubled financial institutions, outright
asset purchases, and interventions in credit markets. These measures have helped support
financial markets and thereby avoid financial meltdown.
Despite such success on the financial front in the early phase of the crisis management,
monetary policy fell short of avoiding deep recessions, which in turn triggered severe strains
on the fiscal status of many advanced economies. The ensuing eurozone fiscal crisis is still
an on-going event that is preventing the global economy from recovering a sound growth
momentum - even four years after the outbreak of the global crisis.
As we have seen in many instances, central bank activism is indeed pivotal in crisis
management. But we should also be mindful of potential adverse side effects. Socializing
private losses may easily lead to moral hazard while central banks' over-stretched balance
sheets could end up constraining the flexibility of future policy operations. Massive increases
in official liquidity may have negative spillovers across sectors and national borders. In this
light, we should keep in our mind that monetary policy is no panacea. I believe that an
indepth review of post-crisis monetary policy and its outcomes, including both successes and
failures, should be a first step toward establishing new thinking on monetary policy.
To be complete, however, our new thinking should go beyond its operational aspect to cover
more fundamental dimensions such as the mandates and the governance structure of the
monetary policy as broadly defined. I believe that new thinking on such dimensions is
essential to our efforts to build a stronger institutional basis for crisis prevention.
Many specific questions arise in this regard. Should the mandate of monetary policy be
broadened to include financial stability - particularly in the context of inflation targeting? How
should monetary policy be coordinated with macro-prudential policies? Who should bear the
responsibility of keeping financial stability if multiple authorities are involved? What
institutional structures should be in place to render the monetary authority more
accountable?
All these questions have in fact been taking center stage in the post-crisis debate on
monetary and macro-prudential policy. And there was notable progress in our search for
practical answers.
In retrospect, the monetary policy has been a victim of its own success in that the global
crisis was preceded by the period of the Great Moderation. It is evident by now that ensuring
financial stability is as important as maintaining stable prices. It is also evident that
policymakers - including central banks - failed to detect systemic risks in advance and keep
them under appropriate control. Last but not least, the danger of excess leverage and global
liquidity expansion has been downplayed in the midst of stable inflation.
In this light, I commend highly the initiative led by the G20 in formulating a new financial
regulatory framework that can be an effective complement to monetary policy in achieving
price and financial stability simultaneously. Specifically, the Basel III framework requires
stronger capital and liquidity buffers than its predecessor, and also includes a set of
macroprudential tools. Regulations on Global-SIFIs should help address possible market distortions
arising from the too-big-to-fail hypothesis.
For emerging economies with highly liberalized capital account, it is of utmost importance
from a macro-prudential perspective to guard against adverse shocks of external origin and
associated volatile and pro-cyclical capital flows. In this regard, Korea has recently
implemented macro-prudential tools such as adjustable caps on banks' foreign currency
derivative positions and a macro-prudential levy on their foreign currency liabilities. I hope
that Korea's policy experience could be a good reference for other emerging countries.
Despite such commendable progress, however, many critical questions are still left
unanswered or unsettled with regard to the monetary and macro-prudential policies and the
global financial system. I hope this conference will shed new light on these critical issues.
Global cooperation for global financial stability
Now allow me to briefly touch upon the issue of global policy cooperation before closing my
address.
I should begin by saying that we must clearly recognize the enormous complexity of today's
financial realities and economic circumstances. The real and financial sectors are fast fusing,
and ever-growing cross-border activities rule out unilateral actions. As such, no policy
framework is likely to be effective without close cooperation among countries. This is indeed
one of the key lessons from our policy responses to the global crisis.
In today's highly interconnected world, financial disruptions in one country or region would be
no longer a problem of the country or region alone. By the same token, policy measures
taken by a country can easily affect other countries. For example, extraordinary monetary
easing by major central banks does appear to have helped their home countries contain the
fallout from the crisis. But many emerging countries were forced to confront adverse financial
spillovers from large and sharp swings in the global liquidity condition.
In short, coordinated global efforts to rein in the excessive global liquidity and cross-border
spillovers have fallen short of expectations. And we all know too well that international policy
cooperation has always been difficult to achieve. But history is not destiny. Nor does it mean
that we should give up. A global solution is needed more than ever to overcome the current
crisis, which is a global problem. And for the benefit of all, the global community should be
more united than ever in tackling the enormous challenges that lie ahead of us.
Concluding remarks
Ladies and gentlemen,
The world economy is still struggling to find its way out of the Great Recession. It is in need
of stronger and wiser policy actions that can address the very complex economic and
financial troubles we are facing now. But our understanding of what went wrong and what
should be done is still incomplete. This is even more the case if we turn our attention to the
future of the global financial system and to the monetary and macro-prudential policy
framework.
As I mentioned earlier, I believe that global policy cooperation should be a priority in our
search for an exit from the current crisis. I also believe that effective collaboration between
policymakers and academia is every bit as crucial as that between policymakers.
We do not sit idle by during the crisis. Nor should we sit idle by, being complacent with the
conventional wisdom. We must bridge the gap between reality and our perception of it. It is
our duty and indeed our very real privilege to engage in and work through the conundrums
we encounter today.
I look forward very much to a new thinking on monetary and macro-prudential policy. And I
am confident that this conference will contribute to developing the new thinking that we all
need.
Once again, I wish to extend my heartfelt appreciation to all participants, and my hope for
your active discussion of new insights and views here during the next two days.
Thank you.