greater broadening and institutionalization of such inter - central bank cooperation, to ultimately help establish a global financial safety net. in this respect, east asian countries ’ inauguration this march of chiang mai initiative multilateralization, a multilateral currency swap arrangement covering all asean + 3 members, is a mark of significant regional progress. i am delighted to note as well the recent agreement, at south korea ’ s initiative, to discuss global financial safety net improvement during this year ’ s g20 summits in toronto and here in seoul. establishment of such an international institution is of course by no means easy. for it to be effective, several salient problems need to be resolved, including the “ stigma ” effect on countries needing assistance, on the one hand, and moral hazard on the other. strengthening of macroprudential regulation is also likely to help emerging market economies manage volatile capital flows. even if individual financial institutions are rational, their behavior can generate negative externalities. indeed, as i have mentioned, foreign capital flows to emerging market economies tend to be procyclical, heightening the need for countercyclical policy measures through which these countries can cope with such procyclical flows. macroprudential regulation can be a significant help in this respect, by changing financial institutions ’ incentive structures in ways that internalize the negative externalities caused by their own activities. it is, of course, important to prevent the possibility of regulatory arbitrage in response to our strengthening of macroprudential regulations, and for this international cooperation is very much required. all of these issues should of course be discussed in harmony with our efforts to build a better international financial architecture. and at this moment, i think the g20 may provide the ideal forum for effective international cooperation to this end. concluding remarks i have until now briefly discussed some major challenges that central banks face in overcoming the global financial crisis and afterwards. before closing, i would like to call attention to one final point. in our efforts to search for a new paradigm for central banking, we will naturally develop new economic models and theories. in this regard, one very important lesson from the recent crisis is that such models and theories must face up to reality. the real world does not always work in the way economists would like it to work. and when we face such a situation, it is the theories that need to be twisted, and not the facts that they are supposed to be helping us understand. especially, we should always keep in

choongsoo kim : time for a new central banking paradigm speech by mr choongsoo kim, governor of the bank of korea, at the 2010 annual bank of korea international conference, seoul, 31 may 2010. * * * honorable fellow governors, excellencies, distinguished guests, ladies and gentlemen, it is a great pleasure for me to welcome you to the 2010 bank of korea international conference, which is also being held in celebration of our bank ’ s 60th anniversary. i wish to express my profound appreciation to all of you for attending. let me also take this opportunity to express particular gratitude to our esteemed speakers, presenters and discussants, and to our conference orgaruzers. the theme that we have selected for this year ’ s conference is the changing role of central banks. this is one of the most critical issues that the recent global financial crisis has led us to consider. the global financial crisis and changing beliefs the recent global crisis has shaken many of our beliefs about economics and economic policy. prior to the crisis, many of us talked about the so - called “ great moderation, ” believing that macroeconomic volatility had declined substantially in most advanced economies over the past two decades. the declines in volatility of output and inflation were regarded as a remarkable economic achievement, which we attributed to improvements in macroeconomic, including monetary, policy. many of us also assumed that risk management at financial institutions had improved greatly. but now we feel differently. occurring as it did in such an optimistic environment, the sudden outbreak of the crisis has very seriously challenged our confidence in macroeconomic management and financial regulation. it has motivated us to carefully evaluate what went wrong, and what we must do to avoid any future recurrence of such a destructive calamity. the crisis has also directed attention to a number of particularly salient issues for central banks, among them new challenges for monetary policy, the central bank ’ s role in financial stability, and management of volatile capital flows. i would like to discuss these issues a bit more now. challenges for monetary policy first of all, bitter controversy over several key components of monetary policy has arisen, out of central banks ’ dealing with the crisis. central banks ’ monetary policies have of course evolved over the years. in the mid - 1970s, a large number of advanced economies adopted monetary targeting, to address the high inflation at that time. as the relationship between the monetary aggregates and inflation subsequently grew less stable, however, monetary targeting