norman t l chan : symposium on financial stability – opening remarks opening remarks by mr norman t l chan, chief executive of the hong kong monetary authority, at the hkma financial stability symposium, hong kong, 30 may 2013. * * * good morning ladies and gentlemen, 1. welcome to the hkma financial stability symposium. the symposium marks the 20th anniversary of the hkma, which is a very young central banking institution comparing with its peers. it is very timely and appropriate for the hkma to convene this symposium on financial stability because hong kong, like many of our asian neighbours, have learnt from our own bitter experience in the few years after 1997 just how painful and devastating financial crisis can become. so it is clearly our common wish to do what we can to reduce the risks of financial crisis recurring or at least mitigate the damage that it can cause to the financial system and the economy when it occurs. 2. in this connection, it may perhaps be useful to look back and observe how the mainstream thinking on financial stability have changed or evolved since the time when the hkma was set up in 1993. i would list a couple of key issues below : ( i ) there was the belief that financial crises would only occur in the developing economies because they had weak financial institutions and poor regulatory regimes. advanced economies would be immune as they had mature financial institutions and robust regulatory systems. we now know that this is not true : since the eruption of the global financial crisis in 2008 we have witnessed the fact that even the most advanced economies cannot be immune from financial instability. ( ii ) there was the view that as long as price stability was attained, financial stability would not be a problem. we now know severe vulnerabilities in the financial system can build up even when inflation is stable and output volatility is low. ( iii ) while very few people would doubt the need to avoid financial crises, there was no consensus view, not until more recently, on who or which institution should be given the mandate to maintain financial stability. given what we have experienced after the global financial crisis, the common view nowadays is that central banks should take a leading role in maintaining financial stability, given that central banks would, in a financial crisis, typically act as, amongst other things, the lender or liquidity provider of the last resort. ( iv ) the term “ macroprudential policies ” was little known not long ago but has now become the buzzword that everybody in the financial and

- control agreement with the canadian federal government has been in place for the past quarter of a century. it provides a clear objective for monetary policy and operational independence for the bank2. we also invest continuously in state - of - the - art forecasting models. for example, we recently updated one of our main projection models to include a richer role for indebted households in the transmission of monetary policy — a timely innovation, given that household debt has increased notably in canada in recent years. 3 we use competing models to inform our deliberations when possible. this is like getting your investment advice from more than one broker. we are also exploiting multiple sources of information, such as surveys of businesses, to improve our reading 1 / 6 bis central bankers'speeches of the economy. it would be fabulous if these efforts could eliminate uncertainty altogether, but the real world is not so obliging. the reality is that researchers are aiming at a moving target, given ongoing structural change in the economy, such as the aging of the population. and there is also the possibility of the truly unexpected, such as natural disasters. that means a considerable degree of uncertainty is irreducible at any given time. in the current context, the bank is particularly focused on data that indicate how wages and potential output are progressing, as well as the effects of the two interest rate increases we made over the summer. and we are following trade negotiations closely. so how does the bank deal with this irreducible uncertainty in practice? like many other central banks, we use projection models that capture key economic relationships to produce a forecast. this forecast includes the monetary policy actions likely to be needed to bring inflation back to our 2 per cent target over the projection horizon. the necessary policy actions are generated by what we call a simple “ monetary policy rule. ” this policy rule captures the bank ’ s average historical behaviour and does not change with the level or sources of uncertainty. because of that, it is as if uncertainty has been set aside. this is closely related to “ certainty equivalence ” in the monetary policy literature, which is akin to aiming for the bull ’ s eye, even though you know there are winds that may move your arrow in some unknown direction. 4 while this is a useful starting point, it is insufficient. in fact, there is a rich economic literature that shows why this framework applies only in a limited set of circumstances that do not look very much like the real world. 5 the market participants here will know