prasarn trairatvorakul : monetary policy in an interconnected global economy opening remarks by dr prasarn trairatvorakul, governor of the bank of thailand, at a conference co - hosted by the bank of thailand and the international monetary fund, bangkok, 1 november 2013. * * * distinguished participants, ladies and gentlemen, i am delighted to welcome you to this conference on “ monetary policy in an interconnected global economy, ” co - hosted by the bank of thailand and the international monetary fund. i would like to especially thank our international guests who have travelled a long way to be with us today. this conference will focus on several issues pertaining to cross - country linkages, international shock transmission, and how monetary policy should be conducted in response to global spillovers. one of the most important trends over the past decades is the rapid integration of international trade and finance. trade in goods and services, as a share of world gdp, increased from around 15 percent in the early 1980s to around 25 percent before the start of the crisis in 2007. these developments reflect, in part, the increasing internationalization of production through vertical trade linkages. we have also seen a significant increase in financial integration. while the annual growth in world trade over the past 40 years has exceeded the growth in world gdp by around 2. 6 percent on average, growth in international external positions outpaced growth in world gdp by almost double that – around 4. 8 percent. what are the implications of these tighter trade and financial linkages? most prominently, global interconnectedness implies large and swift transmission of shocks across countries. a seemingly localized supply shock, such as the tsunami in japan or the floods in thailand two years ago, created ripple effects in various parts of the world by disrupting the global supply chain of production. from the perspective of most asian economies, the abrupt economic contraction in the us and the euro area during the financial crisis were examples of external demand shocks. while such “ real spillovers ” generated by supply or demand shocks can be quite damaging, the avenues for dealing with them are apparent and relatively uncontroversial. fiscal automatic stabilizers should be allowed to work fully and monetary policy could be eased to cushion the impact so long as medium - term inflation expectations are contained. calibrating the policy response to these shocks may not be straightforward, but they do not, in of themselves, pose challenges to the underlying framework of policy. on the contrary, “ financial

economy experiences a negative shock. this will limit room for monetary policy responses using short - term interest rates. taking these points into account, it is now widely accepted around the world that it is desirable to target inflation somewhat above 0 percent. many advanced economies, such as the united states, the euro area, and the united kingdom, have set a target of about 2 percent. it could be said that this level has become a global standard. the bank decided on the price stability target of 2 percent and announced it in january last year. the bank subsequently introduced and has been pursuing qqe in order to achieve the 2 percent target at the earliest possible time and maintain it in a stable manner. based on this unwavering determination and corresponding actions by the bank, firms and households will be able to base their behavior on the assumption of 2 percent inflation. if the perception that inflation will be around 2 percent becomes entrenched, then people will expect inflation to return to about 2 percent in the medium to long term even if it temporarily fluctuates due to shocks to the economy. this is what is meant by “ inflation expectations are anchored. ” this is an important element to prevent the economy from falling into deflation or to avoid inflation rates from continuing to rise substantially beyond 2 percent. the bank will continue to pursue its monetary policy aiming at achieving 2 percent inflation and anchor inflation expectations at that level. achieving the 2 percent inflation target and japan ’ s growth potential next, let me talk about the growth potential of japan ’ s economy. the potential growth rate of japan ’ s economy – that is, the rate of growth at which japan ’ s economy can grow in the medium to long term in a sustainable manner – has been declining due to such factors as the aging and decline of japan ’ s population, as well as the slowdown in capital stock accumulation during the period of protracted deflation ( chart 15 ). against this background, some have voiced the concern that japan ’ s growth rate will not increase due to supply constraints such as labor shortages. others have argued that it is not desirable to have inflation under low economic growth. bis central bankers ’ speeches these concerns should be considered by separating short - term economic developments and the medium - to long - term growth potential. in the short term, even if the expansion of specific industries or firms is constrained by supply - side problems, the economy as a whole can grow above its potential by raising utilization rates and improving the efficiency of labor and