Dimitar Bogov: Around a decade after the crisis - heading to the
new global cycle and monetary policy normalization
Opening speech by Mr Dimitar Bogov, Governor of the National Bank of the Republic of
Macedonia, at the 7th Annual Research Conference: Around a Decade after the Crisis:
Heading to the New Global Cycle and Monetary Policy Normalization, Ohrid, 12 April 2018.
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Honorable Governors, Your Excellences,
Dear representatives of central banks,
Ladies and gentlemen
Let me welcome you all to our 7th Annual Research Conference this year in the beautiful city of
Ohrid. Considering the current global surrounding, this year's conference "Around a Decade after
the Crisis: Heading to the New Global Cycle and Monetary Policy Normalization" addresses a
relatively long period since the onset of the global crisis and the need to face new challenges. At
this point, the questions to ask ourselves and to discuss during the conference would be: how
strong and sustainable is the ongoing global recovery, what are the reasons behind the subdued
inflation, what should be the pace of monetary policy normalization, are the banks now more
resilient, are we better prepared to prevent the risks? Maybe they are simple questions, however,
like in many other cases in real life and a real economic framework, there are no simple
answers.
The current global economic recovery is broadly spread across different regions in the world and
associated with positive economic sentiment indicators. Along with the ongoing monetary policy
normalization in the US economy, the new US fiscal package and its impacts on the economy
also absorbs attention. In the EU, as already clearly announced, the accommodative monetary
policy, although with lower amount of assets purchase, is expected to apply by September this
year or beyond and interest rate changes to take place later. However, the positive global outlook
has still been surrounded by various risks, including the still pending outcome of Brexit
negotiations, geo-political risks and the possible protectionism measures by the US
administration.
However, besides the sound and wide spread recovery, an important feature of the global
environment is the generally subdued inflation, not always in line with the model-based forecasts
and standard empirical findings. In this view, the flattening of the Phillips curve based on current
economic data, points to possible altering of the standard relation between the economic cycle
and inflation, raising discussion on one of the basic empirical findings in the macroeconomics in
the academic and central banking community. The subdued inflation nowadays is mainly due to
global factors that are not exclusively related to the commodity prices fluctuations, but also to the
impacts of the globalization of production and digitalization of trade worldwide, both having
impact on competition and prices in each economy. In such surrounding of prolonged lower
inflation, the re-assessment of the time lag in affecting the inflation as well as the inflation
measurement, the outlook of inflation expectations and their possible de-anchoring are to be
considered.
The current economic developments and outlook point to new a global cycle and the need of
gradual normalization of monetary policy. Gradual approach is required to avoid the so-called
"taper tantrum" episodes that financial markets have already experienced during the US tapering.
A stronger and clear monetary policy communication should be in favor of preparing market
agents for the future monetary policy changes and smother reaction when they take place.
The monetary policy normalization in advanced economies could produce different impacts for
emerging economies and their monetary policy. Any capital outflows would be highly dependent
on the size and structure of the financial liabilities, especially regarding the existence of interest
rate sensitive capital flows, that is not always the case in emerging economies with lower level of
financial integration, where more usual are the direct investment, trade credits and banking
sector capital flows. On the other hand, the more restrictive financial conditions in advanced
economies in a medium run could eventually lead to lower external demand in the emerging
economies. The impacts on the fiscal policy are more serious, implying stricter conditions for
external budget financing, signaling the need to start or continue with fiscal consolidation, in the
emerging economies where it has already started. Having in mind country specific reasons,
monetary policy normalization in emerging economies may come with different lag.
Speaking about the Macedonian economy and countries from Western Balkan region in terms of
facing the new global cycle, we have to mention some strong points and some still existing
weaknesses. Generally, sound and stable banks have additionally strengthened due to the new
capital requirements during the last several years, as well as due to the stronger efforts for better
nonperforming loans management and resolution. Current account deficit region-wide has
reduced as a result of the favorable price impact, in line with commodity prices slowdown and in
the Macedonian case, due to the contribution of new companies with foreign capital that
significantly changed our export structure into higher value added products. We have seen
positive results in the dealing with unemployment as one of the main problems in the region. In
Macedonia, it has significantly reduced due to new jobs creation, measures against informal
economy and active labor market measures.
However, the countries of the region should continue strengthening their potential growth,
productivity and competitiveness. The total factor productivity growth in many emerging
economies registered a slowdown during the crisis mainly reflecting the slower growth and
technological progress in advanced economies. However, the emerging economies must
strengthen their activities towards higher efficiency on all levels of operation, building institutional
capacity and further implementation of structural reforms that all together should improve total
factor productivity contribution and boost the overall convergence towards advanced economies.
The public debt and fiscal consolidation are still an area that requires additional vigilance by the
policymakers in emerging economies, especially in light of changing financial conditions in the
upcoming period.
Around a decade after the global crisis, we have seen that the banks, globally, are in a quite
better shape. However, the reforms and Basel requirements should be fully implemented in order
to build resilient banks. The digitalization is yet another interesting phenomenon of today's life and
unavoidable element of the current global environment. Fintech in banking industry provides new
revolutionary approach to the supply of banking services, as a response of the banks to the
changing habits of their clients. This creates new opportunities, but also risks that regulatory
authorities must be aware of. Therefore, globalization and innovation in financial sector call for
deepening the international cooperation between authorities in different fields of operation.
This conference is just one of the possible forms of this international cooperation. Today, we will
discuss the empirical findings from the research papers received upon our Call for papers, on
different and very important central banking issues, while tomorrow we will have panel
discussions on policy issues with high-level representatives from central banks and international
institutions. I believe that all together, we will make contribution by answering the pending
economic questions that I mentioned earlier and exchanging experiences that will enable us to
better cope with the future challenges.
I wish you interesting conference, fruitful discussion and pleasant stay in Ohrid!
Thank you.