In this regard, flexible exchange rate serves as an automatic stabilizer to cushion against external shocks and economic imbalances in the short-term, and as an important price signal for resource allocations and catalyst for structural changes in the long term. In some cases, however, exchange rate flexibility and fluctuations can have costly consequences given some economic contexts, particularly in emerging market economies, including Thailand. First, financial markets in these economies are less developed and relatively illiquid compared to advanced economies. This may potentially cause extremely large asset prices and exchange rate movements in response to capital flow volatility. Additionally, the availability of foreign currency hedging instruments, especially to small enterprises, remains limited, amplifying the negative repercussions from exchange rate volatility. Moreover, many emerging market economies, including Thailand, rely on exports as the main engine of growth. Many of their export items often command little bargaining power and hence need to compete on the basis of price. As a result, extreme and sudden exchange rate movements would affect firms’ competitiveness. For these reasons, many emerging market economies cannot neglect the implications of exchange rate movements. This leads us to the next part of my talk this evening. Managing capital flow and exchange rate stability Ladies and Gentlemen, There is no one-size-fits-all measure to deal with capital flow and currency volatility, as well as its impacts on the real economy. Take Thailand as an example. We have adopted multi-dimensional responses to the financial spillovers.

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.