On the other hand, tighter financial linkages imply large and swift transmission of shocks across countries, particularly through a large expansion in gross capital flows with an increased volatility of those flows and exchange rates. The challenges we face in Thailand to large extent also apply to emerging markets as a group. The massive equities and bonds sell-offs in emerging markets during the taper tantrum episode in 2013 were vivid examples of “financial spillovers”. There is no doubt that the benefits of integration into global economic and financial markets outweigh their costs. Therefore, the relevant question is thus how countries should respond to increased capital flows volatility. This year, we gather here at an important juncture of what seems to be yet another shift in global economic and financial landscape. This may create a challenging environment for small open economies to conduct policy, particularly capital flows and exchange rate policy. Given recent economic and financial development, it is clear that the main drivers of ensuing volatility in capital flows and exchange rates are threefold. First, policy divergences among advanced economies appear to be on course recently. While the US is expected to raise its policy rate, likely by the end of this year, recovery of the euro area economies and Japan remains unsteady, with ultra-loose monetary policies put in place for a longer period. Second, uncertainties surrounding Greece’s bailout program have rendered great shifts in market players’ risk on and off sentiments. Third, growth momentum and prospects in China and some other emerging markets are deteriorating.

The exchange rate management framework focuses on mitigating short-term excessive exchange rate volatility and ensuring alignments with economic fundamentals in the medium to long term. Exchange rate flexibility constitutes the primary buffer to cushion the effects of capital flow volatility. In the case that resulting movements in exchange rates are deemed excessive and unjustified by fundamentals, foreign exchange interventions can be undertaken. More controversial, but now increasingly accepted internationally as one of the policy options, are capital flow management measures (CFMs), aimed at directly curbing international financial flows via regulations and taxes. While there are clear economic rationales for CFMs, given the abundance of market inefficiencies and externalities, many countries tend to regard these measures only as a last resort. As such, reputation costs, asymmetric effects in managing outflows versus inflows, lack of long-term effectiveness, and limited room for calibration are but a few considerations that policy makers need to take into account. 2  BIS central bankers’ speeches  Regarding foreign exchange rate interventions, we are always mindful of its costs and limited effectiveness. In particular, interventions against market views would employ large financial resources while yielding limited success, usually only to delay the pace of exchange rate movements. Active interventions under the inflation targeting framework regime may also have unintended consequences on policy framework credibility, as the central bank’s commitment to safeguard the overall macroeconomic stability may be called into question by the public. For this, consistent communications about monetary policy framework and stance would help increase central bank’s transparency and public understandings.