The aim is to put in place elements that will facilitate the deepening of trade and investment linkages within Asia while also collectively working towards strengthening Asia’s resilience and stability. Asia’s economic transformation, comprehensive financial sector reforms and fiscal prudence have provided important support to Asia’s resilience and ability to withstand the destabilising spill-over effects of the current ongoing global financial and economic crisis. In addition, the regional surveillance mechanisms are being reinforced by financial support facilities and an integrated framework for crisis resolution. Every financial crisis has prompted a review of the role, function and authority of central banks. Indeed, developments in this recent four years have had profound implications on the central banks of crisis affected countries. The mandate of central banks for financial stability has generally been strengthened considerably to deal more effectively with risks in the financial system and economy. This has been accompanied by a fundamental review of governance arrangements and regulatory reforms at the international level. At the extreme, responses of central banks to the crises in the US and Europe have ventured beyond conventional approaches. In the area of surveillance, existing monitoring frameworks have been extended to capture risks and vulnerabilities emerging from areas beyond the traditional perimeters of regulated financial institutions and markets. In this respect, effective coordination between the macroprudential and micro-prudential surveillance functions have become more important, given that supervisory interventions and crisis management measures are now being applied to a wider set of institutions and markets.

Some people would argue that the stocks of assets held by Central Banks matter more than the flows of purchases. Others would contend that the composition and size of purchases are the real levers. The issue boils down to whether an expansion in the monetary basis is enough to trigger credit expansion or whether the latter is correlated to banks willingness to expand credit and more importantly to the appetite of economic agents to borrow. Based on how monetary policies have been conducted for the past several decades, banks have always had the ability to expand credit at a given level of interest rate irrespective of the size of the Central Bank’s balance sheet. Being at the ZLB does not change that simple reality. Hence I would tend to argue that, given the transmission channels of an asset purchase program, its composition and length may matter as much as its size. In any event, increasing the size of the Central Bank’s balance sheet, via large scale asset purchases, sends very important signals. This “signaling” operates at several levels. It may contribute to strengthening forward guidance on the policy rate. More importantly, it may have a direct impact on inflation expectations, therefore contributing to lowering real interest rates. When the balance sheet size is explicitly linked to the achievement of an inflation objective as in Japan, it may prove an effective tool to communicate the monetary authority’s determination – what economists would call a “commitment device”.