7 But then the financial crisis arrived and the transmission mechanism broke down. The expression ‘pushing on a string’ was coined, meaning that policy rate adjustments from the central bank did not spread to other interest rates as expected, if at all. An established approach became significantly less useful in that it said nothing about what should be done if the transmission mechanism stopped working. This required another kind of analysis, based on the understanding that the financial markets were not functioning without friction or normally, and that was able to use this diagnosis as a starting point to suggest appropriate measures. I will come back to this later. Preparedness and flexibility – a new, yet familiar, way of thinking The last decade has been turbulent and the Riksbank and other central banks have several times had to act in situations where uncertainty is considerable. When the transmission mechanism broke down during the financial crisis, the central banks took measures to maintain the functioning of the financial system. And now, during the coronavirus pandemic, the Riksbank has taken a number of different measures to ensure that there is no doubt that there is plenty of liquidity in the economy. Thanks to measures by central banks and governments around the world, the pandemic has not turned into a financial crisis. As I mentioned earlier, these measures entail a different way of conducting monetary policy compared to the one that was part of the prevalent approach from the time before the financial crisis.
And for the new challenges to be met and the new opportunities to be exploited, there is often the need for new approaches and new initiatives, at both the national and international levels. There is a view, for example, that trade integration in the region has not been adequately served by financial integration, given restrictive controls on capital mobility still being practised in selected jurisdictions. As a result there is some doubt as to whether the long term development potential of the region has been maximised and whether the rapid economic growth the region is experiencing is sustainable. There is further concern from the point of view of the maintenance of monetary and financial stability. New approaches and new initiatives are indeed necessary to promote greater financial integration in the region. I am sure there are many other areas concerning development of the region in which new approaches and new initiatives may be desirable. Being a regional financial institution of strategic importance, it is obvious that the ADB has a significant role to play. I would argue that this should be a role of increasing significance, or even a pivotal role, given the increasing interdependence among jurisdictions within the region and therefore the greater need for regional co-operation. The ADB has the right institutional framework for promoting such co-operation, and I am glad to see that under the leadership of the President there has been increasing involvement of the ADB in regional financial cooperation recently.