bonds to cover losses in the financial system. today, the thai bond market is therefore much larger, at 38 % of the gdp. we have a much more active market. what does an active bond market mean to monetary policy? i will highlight three points. first is the implication on transmission mechanism. when the central bank wants to change stance in monetary policy, it changes interest rate up or down. but it does not directly change the interest rates along the whole spectrum of the yield curve. it only affects the key policy rate, which in the case of thailand is the very short - term 14 day rate in the repurchase market. however, to have an impact on the real economy, there must be a way to transmit this signal all the way to the financial activities that determine economic transactions, such as business capital formation, household consumption and savings. the traditional channel is through commercial banks. and now we have another channel through the corporate bond market. this channel is poised to grow more rapidly in the future. the second aspect is that central bank also operates in the government bond market in its conduct of monetary policy. it can sell and buy bonds to pump money in or out of the system, through their open market operations. an efficient, deep and liquid bond market therefore will not only help make the intermediation process competitive and active - but also allow the central bank to transact in the market more effectively. the third aspect is the function of the bond market in managing the capital flows. emerging market economies when they are successful tend to attract capital inflow very quickly, and in very large quantity. unfortunately, if things turn bad, the outflow of capital can also be equally quick and in as large a quantity. how can one better manage this volatile capital flow? to some extent, i think the risks can be mitigated with a well functioning bond market. if we can make it function as a temporary reservoir to store the incoming water, and more slowly releasing it to the various users of fund within the country, at the right pace for absorption - if the market selection process can be made such that only the projects with really viable, economic prospects are granted the fund - and, if the foreign owners of fund can be persuaded to hold the instruments denominated in borrowers ’ own currency, thereby shifting the position on the foreign exchange risks from the borrowers to the investors, then the bond market can be a safer channel for capital flows than the commercial banks. at this point

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