Countries with stronger macroeconomic fundamentals experience less volatile capital flows and are therefore less disrupted by them. “Fragile five” episode was a case in point for the market to differentiate countries, with high current account deficits and high inflation as the focal point. In most cases, strong macroeconomic fundamentals include both internal and external fronts. Internal front involves improved fiscal discipline, banking system with prudent supervisory and regulatory frameworks, stabilized inflation, wellequipped financial markets, and credible monetary policy framework. External front includes sufficiently flexible exchange rate, adequate foreign reserves, and manageable external debt levels. In addition, well-diversified sources of finance among bank-based, debt and equity markets would be supportive of financial stability. Concluding remarks 4  BIS central bankers’ speeches  Ladies and Gentlemen, I have spoken at length, from the subject of global volatility, onto more policy options issue based on central banks’ perspectives. Let me now wrap up by leaving you with a final remark on these issues. In the world of increased financial integration, volatility of capital flow and exchange rate is unavoidable. A sustainable path forward requires going beyond coping with capital flows to living with them. Therefore, public and private stakeholders must remain vigilant of any impacts they may have on real economy. Thailand’s approach so far has been to allow the exchange rate to act as an automatic stabilizer, while its extreme movements are carefully managed. At the same time, reforms are actively pursued with the economy’s long-term resilience as our ultimate goal.

This would lead to more bargaining power, and hence less  BIS central bankers’ speeches  3  sensitive to exchange rate fluctuations. Stronger domestic consumer base would also help lessen the dependence on external demand. All reforms I mentioned require concerted efforts from all public and private stakeholders. Policymakers should provide economic environment and infrastructure conducive to reforms. Particularly, financial literacy and risk management awareness should be fostered at all levels and sectors. Financial institutions also play a crucial role in developing financial products to facilitate transactions and risk managements. Businesses should upgrade productivity to enhance industry’s resilience to shocks. Advanced preparations will surely pay off. Lessons learned, challenges ahead, and policy implications Ladies and Gentlemen, As we are approaching the end of my talk, let me now share some final thoughts on lessons learned and challenges ahead. First, for countries that want to maintain autonomy on interest rate policy, exchange rate flexibility is a pre-requisite to living with capital flows. Nevertheless, extreme exchange rate fluctuations may cause misalignments. A trade-off between flexibility and stability thus requires policymakers to identify the exchange rate framework suitable for the economy. This can be a daunting task in practice, as the target is often country-specific and subject to dynamic economic developments. Keep in mind that monetary policy can do little to influence real exchange rates in the long term. Attempts to give the exchange rate more weight in monetary policy deliberations will also reduce the autonomy in controlling interest rate, leading to more interest rate volatility.