##ional tools to the full extent necessary to provide the same degree of stimulus as it would provide if it could set interest rates at negative levels. that might be because of uncertainty about how nonconventional tools will work or because of the potential costs associated with the use of such tools in terms of market functioning and the risks of future financial instability. second, financial instability can impair the linkage between monetary policy and financial conditions. the central bank may move to a much more accommodative monetary policy stance, but this may not lead to much improvement in financial conditions. we see this clearly in spreads and risk premia during periods of financial stress. depletion of capital in the banking system or the interaction of frictions and market failures may also lead to constraints on the availability of credit following a financial shock. as a recent u. s. example of the second issue, households with lower fico scores have had difficulties in refinancing krishna guha, marc saidenberg and others on my staff contributed to these remarks. as always, what i have to say here today reflects my own views and not necessarily those of the fomc or the federal reserve system. bis central bankers ’ speeches their mortgages or in obtaining new mortgages to purchase a home. this stems from worries by lenders about put back risk – that such mortgages might be put back to them by fannie mae or freddie mac should the mortgages become nonperforming. for any given reduction in mortgage rates relative to normal levels, this reduces the support for the housing sector and consumption. thus, another lesson of the crisis is that monetary policymakers need to be more attuned to how the condition of the financial system influences how monetary policy changes affect financial conditions. third, the linkage between financial conditions and aggregate demand may also be impaired. for example, if an asset bubble has caused a buildup of debt that now needs to be reduced significantly, then lower interest rates that ease financial conditions may not stimulate aggregate demand very much. separately, in a protracted zero bound episode, the monetary policy impulse may become attenuated over time. lower interest rates may make financial conditions easier, lifting wealth, and encouraging households to shift spending from the future to the present. but when the future arrives, spending may then be lower as a consequence. the linkage between financial conditions and economic activity may vary depending on how long the accommodative monetary policy regime has been in place.

prasarn trairatvorakul : limitations of monetary policy – the context of thailand speech by dr prasarn trairatvorakul, governor of the bank of thailand, at the foreign correspondents ’ club of thailand ( fcct ), bangkok, 17 june 2013. * * * good evening ladies and gentlemen, i would like to thank the foreign correspondents ’ club of thailand for the invitation. it is my honor and pleasure to be back here again to share with you my views on thailand ’ s economic outlook and monetary policy. we indeed live in a volatile and uncertain world. just a few months ago we still talked about a two - or three - speed global economy as a fact of life, with robust growth expected of emerging markets and sluggish recovery to remain with the major economies. today, with some possibility of an earlier - than - expected tapering off of qe, coinciding with the apparent slowdown in many emerging market economies, the convergence of the world economy is already expected by some. one obvious consequence is the market overreaction to these premature signs of the convergence. the unsettled sentiments over a potential end of cheap money may have contributed to sizeable outflows of capital from emerging markets during the past few weeks. as a consequence, emerging market currencies including the thai baht depreciated sharply, reversing gains since the beginning of the year. one lesson from this recent episode is that, expectations can go a long way in influencing people ’ s behavior, and often with implications for policymakers. specifically, it reminds us how powerful the expectations channel of monetary policy transmission can be. it is therefore of utmost importance that central banks properly manage expectations so as to maximize monetary policy effectiveness and maintain policy credibility. this draws me to the focus of my talk this evening : the limits of monetary policy, namely, what monetary policy can and cannot do. given unprecedented economic headwinds of various sources, monetary policy around the world has been under immense demand. but these expectations, if unrealistic and not met, could damage central bank credibility, and end up diminishing central banks ’ influence, with unnecessary costs to the economy. thus, it is important that central banks establish realistic public expectations on their policy. but before i turn to that topic, let me first review current economic conditions, the outlook for the thai economy, and recent monetary policy response. recent economic developments and monetary policy response despite robust