nout wellink : financial globalisation, growth and asset prices speech by dr nout wellink, president of the netherlands bank and chairman of the basel committee on banking supervision, at the international symposium on “ globalisation, inflation and monetary policy ”, organised by the bank of france, paris, 7 march 2008. * * * financial globalization and financial innovation i have been asked to introduce the round table with a group of very distinguished panellists who will discuss the topic of “ financial globalisation, growth and asset prices ”. i was pleased to see that the panellists, through their different fields of expertise, will be able to illuminate us with a broad range of ideas on this topic. before giving them the floor, let me raise a few issues. financial globalization, like most good things in life, has its doses of risks and challenges. the recent wave of financial globalization, which began in the mid 1980s, has been seen as a catalyst for financial innovation. we have witnessed borders opening for banks and other market players. as a result, global financial markets have become deeper and more diversified and financial products have become more complex. in response to these changes, supervisors and the industry have had to keep pace by adapting the regulatory structures. the basel ii framework in that sense is inherently flexible with its risk - based approach. even so, as lessons from the turmoil become clearer, it may be necessary to fine - tune certain elements of basel ii. to make our work as central bankers even more interesting, financial globalization has changed the environment for monetary policy with the growth of cross - border financial flows and the transfer of risk across different jurisdictions. in response, central bankers have also taken a number of steps to adapt their strategies to support financial markets and price stability. just to mention a recent example, the collective actions among central banks to facilitate liquidity provision in short - term money markets were an important initiative in this sense. but to what extent does increasing financial globalization affect the efficiency and stability of asset prices and economic performance in general? financial globalization, growth and asset prices in the past years, as financial globalization and deeper financial markets became more prominent there was an improvement in the stability of the macroeconomic environment. global inflation was contained, accompanied by a decline in the volatility of economic growth, exchange rates and interest rates leading to the so - called great moderation. 1 these factors contributed to improving market sentiment. liquidity seemed plentiful and this perception had a strong influence on the

nout wellink : the role of financial imbalances in the setting of monetary policy – lessons from the current crisis introductory speech by dr nout wellink, president of the netherlands bank and chairman of the basel committee on banking supervision, at the workshop on “ the role of financial imbalances in the setting of monetary policy. lessons from the current crisis ”, amsterdam, 23 june 2008. * * * the recent financial turmoil has highlighted once again that the role of financial imbalances is a major challenge for central banks focusing on price stability. most of the analyses of the causes of the financial turbulence that i have read stress the role of new financial developments, which make this event special. but the recent crisis is just one of a series of episodes over the past 30 years when the paths of asset prices – most notably equities and housing – were a highly distorting factor that ex post turned out to have disruptive macroeconomic effects. the aim of this workshop is to further our understanding of the role of monetary policy in addressing financial imbalances. the speakers in the panel that will follow my remarks will discuss whether monetary policy should be actively used to prevent the build up of financial imbalances, and what the optimal monetary policy response should be when financial imbalances do occur. this debate hinges on the question of whether we can ex ante identify imbalances that are building up. in my remarks, i will address this issue based on my experience as policy maker. in my view, there are several, interrelated ingredients of an accumulating imbalance : the first is low real long - term interest rates relative to a natural rate of interest, particularly in a context of a robust economy characterised by high productivity growth, strong economic growth and low inflation. it is well known that the natural rate of interest is difficult to estimate – just think about the challenge of assessing changes in productivity growth. but i think that a comparison with a historical average of past actual rates can give an idea of whether interest rates are out of line. low interest rates underpin the second ingredient, which the recent financial turmoil has brought to everyone ’ s attention – strong credit growth. the current intellectual debate highlights how standard macroeconomic theories in the lucasian tradition – based on optimizing agents with rational expectations, complete markets and fully flexible prices – have a hard time assigning credit a relevant role. economists are therefore increasingly turning for insights to the theories of minsky or kindle