In addition, active and widespread use of foreign currency hedging instruments is also beneficial to mitigate the negative knock-on effects from exchange rate volatility. Liberalization of outward investment by domestic investors also helps promote more balanced capital inflows and alleviate upward pressure on the exchange rate. These international asset holdings can provide a buffer when domestic market faces rigorous tests of volatility. Nevertheless, liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh costs. The appropriate degree of liberalization for a country at a given time depends on its specific circumstances, notably its financial and institutional development. More stable and long-term flows, particularly direct investment flows, should be liberalized prior to short-term portfolio flows, which are more volatile and sensitive to cyclical factors. In October 2012, the BOT launched the Capital Account Liberalization Master Plan. This was part and parcel of our longer-term plan to facilitate Thai companies to diversify their investments abroad, especially in neighboring countries. This would encourage private companies to operate their businesses more efficiently by expanding their markets and production bases. In turn, such diversification will help strengthen their competitiveness and absorptive capacity. At the other end of the spectrum, limiting leverage in the banking system would add more cushions to the economy against external shocks. Last but not least, developing fundamental economic strengths to enhance countries’ resiliency to external shocks can work through well-diversified export items focusing on high value-added products.

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.