andreas dombret : introductory statement - iif international capital markets and emerging markets roundtable introductory statement by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the iif international capital markets and emerging markets roundtable, washington dc, 20 april 2018. * * * ladies and gentlemen ever since the ground - breaking work of solow in the fifties most policy makers and members of academia – especially in the advanced economies – have inclined to favour free capital flows. many crises later, the view has somewhat shifted, in particular, regarding emerging markets and developing countries, which is the group of countries that i will focus my remarks on. not only can capital flow reversals and in the extreme form sudden stops create significant costs in terms of output losses, financial instability and even political instability. but from all we know today it is surprisingly difficult to find empirical evidence of capital account liberalization being beneficial in terms of output gains, investment, productivity gains, or risk sharing for countries that have not progressed sufficiently far in their institutional development. much of the work on this has been carried out by the imf and indeed by maurice obstfeld himself, so maurice should correct me if i am wrong, but essentially liberalized capital flows should go hand in hand with functioning judicial systems including well enforced property rights, developed and well regulated financial systems as well as stability - oriented macroeconomic policies. there are even longer lists, but these seem to be the minimum requirements. so, given that these conditions are not always met fully, should countries resort to capital flow measures if faced with volatile flows? by the way, i am using the imf terminology of capital flow measures. these are basically capital controls plus those macroprudential measures that aim to limit financial stability risks arising from cross - border capital flows. i think we all agree that sound domestic policies should always be the first line of defence and that capital flow measures should not substitute for warranted macroeconomic or exchange rate adjustments. but it is also useful to state an obvious but often overlooked fact : unlike restrictions on the current account, the imposition of capital flow measures is not under the jurisdiction of the imf, thus, any country can basically adopt such controls as it deems necessary to regulate capital movements. however, capital flow policies are part of the funds surveillance and as such open to an assessment of their impact on the international monetary system. objectives of capital flow measures usually are to maintain monetary independence, to mitigate exchange

##sustainable fiscal deficits in debt - ridden countries and too little toward growth and job creation. i believe that redirecting of financial resources more toward growth – more specifically, toward countries with high productivity – could yield substantial stability benefits to all in the long run. this is why i see a greater role for asia going forward. asia weathered the global crisis well, and has thus far remained resilient to negative spillovers from the on - going fiscal crisis in europe. moreover, many expect asia to develop even more into the engine of global economic growth. but asia also faces many challenges. its source of growth is skewed to external demand, and there is limited scope for domestic demand to play a major role. intra - regional trade has been on the rise, true, but it remains only secondary to trade with other advanced regions. our regional financial markets are meanwhile underdeveloped, less satisfactorily integrated, and vulnerable to shocks of external origin. while asia accounts for over one - third of world gdp, its share in world finance is less than one quarter. bis central bankers ’ speeches that said, i find the theme of this conference to be highly topical. asian market integration and financial innovation should, i believe, be our path to prosperity and stability. in what follows, i would like to set out my views on this theme, with a particular emphasis on the role of the central bank. asian market integration : a way forward to financial deepening and stability let me begin by addressing the benefits and the risks of financial integration in asia. asian economies grew rapidly over the past several decades, by integrating themselves to the world economy through trade. during the catch - up process, asia was able to upgrade and boost the scale of its productive capacity and, through learning - by - doing, significantly reduce its productivity gap vis - a - vis its advanced trading partners. i believe that financial integration can and should bring the same benefits for asia as trade integration. in principle, financial integration facilitates domestic financial development, improves resource allocation within and across countries, and ultimately promotes growth. the diverse stages of development and demographics of asian countries offer fertile ground for such efficiency gains from financial integration. these benefits are relatively well understood. another important but less known benefit is a stronger market base for financial stability. financial integration tends to bring about greater market liquidity, improved risk allocation and enhanced competition, all of which contribute to financial stability by allowing market participants to better absorb and trade risks among