prasarn trairatvorakul : unleash prosperity through regional connectivity address by dr prasarn trairatvorakul, governor of the bank of thailand, at the “ aec + 3 summit and expo ”, jointly sponsored by kasikornbank, the international trade promotion department, the board of investment and the economist magazine, bangkok, 2 november 2014. * * * chairman banthoon, distinguished guests, ladies and gentlemen, 1. first of all, i would like to thank kasikornbank for inviting me to speak here at the aec + 3 summit. this event comes at an opportune time in light of the excitement surrounding the asean economic community. 2. as single entities, the countries of asean are characterized by their diverse size and development. as a unified bloc, however, the picture changes dramatically : asean is the world ’ s third in terms of population and the world ’ s fifth in terms of trade and investment flows. being the world ’ s most diverse economic region is also a key strength which has hurled asean into an important player in the global supply chain. 3. much has been achieved already, yet much more is still within our reaches. but to reach our potentials, we need to enhance on connectivity, not only within asean but also with our plus three partner countries. it is on this theme of connectivity that i will focus this evening : i will first provide a snapshot of what has been achieved under asean financial connectivity. i will then use this as a platform to link with the plus three partners and will conclude with ways to unleash mutual prosperity from these connectivity initiatives. key areas in asean financial connectivity ladies and gentlemen, 4. integration under the aec, be it in trade or investment flows, has naturally called for a robust financial integration framework to support such flows. we central bankers in asean have begun working on our asean financial integration framework since 2011, which aims to create a semi - integrated financial market by 2020. work on this initiative is driven by various areas that currently define asean financial connectivity. let me highlight two prominent ones : 5. the first is our work on banking integration through the establishment of “ qualified asean banks ” or qabs. while there are asean banks currently operating in other asean countries, this has been the result of unilateral liberalization. the increasing trade and investment flows in the region call for a more transparent and open system. our asean banking integration

##ors of future exchange rate moves. 5 m. devereux, w. dong and b. tomlin, “ exchange rate pass - through, currency invoicing and trade partners, ” mimeo, bank of canada, 2013. w. dong and d. nam, “ exchange rates and individual good ’ s price misalignment : evidence of long - horizon predictability, ” journal of international money and finance 32 ( 2013 ) : 611 – 36. bis central bankers ’ speeches the authors collect goods - level data for japan, the united kingdom and the united states, calculate deviations from the lop and test to see if the size of the deviations has what they termed “ superior predictive ability ” with regard to future movements in the exchange rate. the results for the united states and japan were particularly encouraging. they showed that the price deviations had significant predictive power, which was positively correlated with the degree of price misalignment and which improved with the length of the forecast horizon ( i. e., the performance got better the further out you went ). in other words, exchange rates seemed to be moving in the right direction, helping to reduce the deviations from the lop. conclusion what can we conclude from all of this? looks can be deceiving. casual observation and evidence gleaned from simple charts would seem to raise serious questions about the functioning of domestic and foreign markets, and about the international trading system more generally. recent studies, however, paint a far more positive picture of the role of exchange rates in influencing relative prices and facilitating the international adjustment. despite the large and persistent price gaps that are frequently observed between canadian and foreign prices at the aggregate level, more detailed work suggests that deviations from the law of one price and purchasing - power parity are not as large or as persistent as many believe. while significant price discrepancies exist, the reasons for them can largely be explained and are not evidence of serious market failure. market forces are at work and are generally pushing prices and the exchange rate in the right direction. however, they do not operate in a vacuum. their movements are affected by other fundamental forces, and what we pay in sackville compared with what we pay in bangor is the end result of many competing pressures. this is not to say that markets are perfect or that there is no room for improvement. significant trade restrictions and barriers to competition exist, and anything that can be done to reduce them –