guy debelle : remarks to the international monetary fund research conference remarks by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, to the international monetary fund research conference, washington dc, 8 november 2013. * * * it is a great honour and pleasure to be here. i, like many in this room, owe stan fischer a great debt. i was the last graduate student that he supervised. you could argue that i drove him out of academia into policymaking! when stan was teaching his macro course at mit, in the very first lecture he used to say : you learn [ the ] islm and mundell - fleming [ models ] in your undergraduate course ( and most of us learnt it from [ rudiger ] dornbusch and [ stanley ] fischer ), then you come to graduate school and we cover that in half a lecture before moving onto teaching more advanced technologies. but then you go out into the real world of policymaking and your first and best intuition still comes from mundell - fleming. so i must say i was struck by emmanuel farhi and ivan werning ’ s claim upfront in their paper1 that, to quote, “ because our model has explicit microfoundations and a formal treatment of general equilibrium, it is better suited for normative analysis than the traditional mundell - fleming models ”. that ’ s a pretty big claim. call me old - fashioned but i ’ m not sure that i buy it. before i get to that, let ’ s think a bit more about some issues that come with a floating exchange rate. emmanuel and ivan talk in their paper about emerging markets, but it ’ s not just an emerging market issue. i will also draw on the australian experience. when the exchange rate is moving in line with the terms of trade, the real fundamentals, it plays the appropriate macro stabilisation role. farhi and werning have that explicitly in their model. in australia ’ s case, over the 30 years of the float, the exchange rate has done just that most of the time. the problem is when financial factors cause the exchange rate to deviate from the real fundamentals. how can that come about? well let ’ s think of a country, which i ’ ll call the usual suspect or us for short. that country pursues an extremely expansionary monetary policy, which is completely justifiable from its perspective. this spills over to

encouraging the process of change in banks. while the prime responsibility for prudent management of banks does rest with the banks themselves, the authorities do have a role to play in ensuring that effective systems of supervision are in place. these should include incentives to discourage the excessive taking of risk by banks, including that owners should be required to have a significant amount of capital at risk and to bear the losses should a bank fail. the infrastructure of business laws, accounting rules and public disclosure requirements must also be conducive to prudent management and market transparency. payments systems must be enhanced to reduce the risk of systemic instability. 29. these are all areas where progress is being made throughout the region. i detect few signs of complacency among my fellow regulators or of a tendency to rest on past successes. we all recognize that banking stability is something that requires constant attention to keep up with changes in the economic environment and with market developments. there is also, i believe, a strong appreciation of the need to work together to promote stability. this is shown by the regional initiatives, through groupings such as emeap, to promote cooperation in supervision and in other financial sector issues. international institutions such as the asian development bank also have an important role to play in encouraging financial market development. i am sure that this forum will be helpful in addressing some of the issues involved, and i am grateful to the adb and the iif for organizing the event and for giving me the opportunity to speak.