recognized that a weak financial system undermines the efficacy of monetary policy measures and can overburden the monetary authorities. for this reason, it may be desirable for prudential policy frameworks to be strengthened, thereby addressing the build - up and unwinding of the imbalances more effectively. in this context, the bank of thailand has also monitored seven areas of financial imbalances, including those in the financial market, real estate, household and corporate sectors on a regular basis. going forward to a time when all this global financial crisis is resolved, it may also be appropriate to revisit and rethink the standard financial regulatory framework, particularly in emerging and even in a more developed part of the world. given the magnitude of market adjustment, volatility and contagion across markets, risk diversification is easier said than done. this is especially true as markets and institutions seem to correlate highly in a crisis situation as risk - aversion intensified. the current financial climate, therefore, highlights the importance of supervisory coordination. this coordination should include both domestic and cross - border dimensions and encompass key regulators and central banks. this is for the benefit of information sharing and elimination of regulatory arbitrage, which has been one of the fundamental causes of this crisis. given increasing financial integration, and growing complexity of financial instrument, market, counterparty links, and changing demarcation line between different financial institutions and financial players, we have witnessed emergence of the new channels and process of spread of systemic risk, through broader groups of players – banks, investment banks, insurance companies, and non - banks – all of whom are regulated under different framework, or not even regulated. because of this, there is a pressing need to rethink the regulatory framework in order to be in keeping with this new paradigm. ladies and gentlemen, it has been said that this crisis will soon lead to major changes in the geopolitical world order. these changes are speculated to lead to a marked decline in u. s. influence throughout the world and as a result the much talk about subject of the “ new world order ”. in our view, however, it might be more fruitful to discuss about the new global framework as a check on global imbalances rather than a new world order. this is because the ultimate winners or losers from globalization are yet to be decided. a long historical perspective is, therefore, needed in order to put the net social cost and benefit of globalization into a

rate target all these objectives simultaneously? of course, in fortunate coincidences where these objectives do not conflict, there is no dilemma. more often than not, however, the policy choices will involve a trade - off between different objectives. policymakers will have to weigh carefully the costs and benefits of a policy decision. given multiple macroeconomic objectives, there is a need for supplementary tools to truly minimize the costs of these tradeoffs. as the first example, what policy instruments can be employed to address risks to external stability? in many emerging market economies, one often finds problems of exchange rate dominance, namely the risk that exchange rate considerations dominate the conduct of monetary policy and distract central banks from the main goal of price stability. the simplest way to address this problem would be to allow for exchange rate flexibility as the first line of defense. of course, this does not and should not rule out interventions to limit excessive exchange rate volatility. that is the next line of defense. should the situation warrant, some type of capital flow management measures can be deployed in exceptional circumstances of sustained and substantial exchange rate overvaluation. however, given their distortive effects and collateral damage it brings upon the economy, any introduction of this type of measures will have to be carefully designed to minimize unintended consequences, especially on productive long - term capital inflows that we highly value. as for the case of preventing financial imbalances, it is sometimes proposed that for policy rate to have sufficient traction in addressing risks to financial stability, the adjustments may need to be so large as to have a significant adverse impact on economic activity, a price too dear to pay. thus, with an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really needs another instrument that acts more directly on the source of the problem. that is what “ macro - prudential policy ” is supposed to achieve. 2. imperfect foresight the second limitation of monetary policy lies with the notion that all policymakers have limited capacity to measure economic performance very precisely even in real time, not to mention to forecast the future. monetary policy is always conducted in an uncertain environment. unforeseen macroeconomic shocks, imprecisely estimated effects of policy on macroeconomic variables, and noisy measurement render monetary policy design and implementation a challenging task. our state of knowledge is also far from a perfect understanding of people ’ s decision making that determine the future evolution of the economy. the task is even more daunt