The economic crisis that began in 1997 represents the latest national challenge. True to historic form, Korea has responded decisively and vigorously to that challenge, with the Bank of Korea playing a critical role in the overall effort. A strong case can be made that, of all the countries affected by the broader crisis in the emerging markets, Korea has gone furthest to repair the damage and institute underlying reforms to prevent future crises. That said, in Korea and elsewhere, the recovery is not yet complete, and more remains to be done. The depth, breadth and rapidity of economic and technological developments of the last several years clearly underscore the increasingly international nature of policy challenges, and the dramatic transformation of the international financial landscape. The intensified integration of markets - reflecting the globalization of capital, production and labor - has increased the risk of contagion, making it virtually impossible for any country that wants to be part of the global trading system to insulate itself from external forces. The crisis and the recognition that we have entered a new environment have set in motion a range of efforts dedicated to building a new international financial architecture. My remarks today will focus on what I believe can be done, from my perspective, to enhance domestic financial resiliency, within the context of these international efforts, and particularly on two essential building blocks: a strong financial system and a sound and stable macroeconomic environment.
To be sure, history is replete with examples of how quickly a once comfortable reserve cushion can dissipate when countries attempt to buy stability rather than earn it by adjusting policy. Nonetheless, markets often seem to take comfort when authorities are perceived to step in with “judicious” market smoothing. Here again, credibility is key in assuring market participants that the central bank’s focus is on preventing disorderly markets rather than on trying to manipulate market prices. As you are aware, much of the emerging world has moved toward floating rates in recent years. For those countries that have made the change in East Asia, it would appear that the new monetary/exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. Inflation is in the very low single-digit range in all of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short-term interest rates that have declined to historically low levels. Moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. But if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. In this regard, I would note that some countries have looked to inflation targeting as a framework to accomplish that end.