In any case, policymakers need to be more practical and innovative in detecting and assessing impacts of the exchange rate on real economy. An ability to monitor adjustments at the micro or firm levels is also a helpful guide on when and how to manage currency risk. Second, amidst an increasing global interconnectedness, policymakers should also be mindful of policy externalities on other economies. Policy coordination and information sharing are thus needed for the optimal policy setting. Of course none of this is entirely new for ASEAN countries. One example is the strengthening of regional financial safety net through institutional mechanisms and arrangements such as the development of Chiang Mai Initiative Multilateralization (CMIM), which will increase the region’s ability to respond to crises, build confidence, and hence lessen possible market turbulence during times of financial stress. Going forward, further collective actions in the region can help mitigate market volatility and enhance countries’ resilience to global shocks. These include promotion of regional currencies as invoice currencies in addition to the US dollar or the Euro, and a bilateral swap agreement as a last resort for foreign currency liquidity. Last, I would like to stress that sound economic fundamentals and policy credibility provide a solid first line of defense, probably the best defense, against capital flow and exchange rate volatility. Despite the global nature of volatility, not all emerging market economies suffer equally. Domestic fundamentals are subject to unrelenting scrutiny by the financial market.

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.