Ravi Menon: Getting in all the cracks or targeting the cracks? Securing financial stability in the post-crisis era Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Asian Monetary Policy Forum (AMPF), Singapore, 24 May 2014. *  *  *  Monetary policy at the crossroads 1 Professor Tan Chorh Chuan, President of the National University of Singapore, distinguished guests, ladies and gentlemen, good morning, and welcome to the inaugural Asian Monetary Policy Forum. Thank you all for coming. 2 I would like to particularly thank Steve Davis of Chicago Booth and Bernie Yeung of NUS Business School. It was your vision and tireless effort that made this Forum possible. You have assembled here a dazzling array of eminent economists and respected practitioners to discuss and debate the most pressing questions in monetary policy today. 3 One of these questions must be: what role should monetary policy play to help secure financial stability? For two decades before the Global Financial Crisis, central bankers thought they had found the secret sauce of monetary policy. The recipe was simple – an independent central bank, a single target (price stability) and a single instrument (the interest rate). Monetary policy was directed at achieving price and output stability, with the central bank’s reaction function well-characterised by the Taylor rule on an ex-post basis. 4 The recipe worked brilliantly. Sustained price stability and steady economic growth were the order of the day. The result was the Great Moderation.
As a result, euro area countries cannot afford to implement a sovereign default without suffering as a consequence of such a default a major breakdown of their financial, economic and social structure. There is no post-war example of a government in an industrialised economy restructuring its debt. For a euro area sovereign to seek to restructure its debt would be a huge leap into the unknown. This aspect is frequently omitted by financial analysts in their  10  The classic reference is Fischer. I (1933). “The debt-deflation theory of Great Depressions”, Econometrica 1(4), pp. 337–357. BIS central bankers’ speeches  5  newsletters or by commentators or academics in their short op-eds. And this is the reason why they do not get the point right when they state that default and restructuring is unavoidable in the euro area. The fourth difference is that, given the much greater depth and intensity of financial and economic integration in Europe, the strength of contagion across financial institutions and markets is potentially more significant within the euro area today than was the case in Asia in the 1990s. That is not to say that there was no contagion in the 1990s. But the cross-border exposures within the euro area are an order of magnitude greater than was the case for such intra-regional cross-holdings in Asian EMEs. This means that the potential for spillovers and a systemic area-wide crisis is much higher and has to be factored into the policy responses.