Bandid Nijathaworn: Macroprudential policies and capital flows – managing under the new globalization Remarks by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the Conference on Macroprudential Policies, organised by the People’s Bank of China (PBC) and the International Monetary Fond (IMF), Shanghai, 18 October 2010. *  *  *  Thank you Chair, First, let me thank the PBC and the IMF for the invitation. It is an honour to be here, and to be given the opportunity to share my view on this panel. Given time limitations, and the fact that capital flows are important developments in the region at this time, I want to use this opportunity to discuss three issues. The first is the context of the current capital flows to Asia. The second is managing capital inflows and the role of macroprudential policies, where I will draw on Thailand’s recent experience. And the third is my view on what we need to do to deal more effectively with the capital flows challenge. At this time, capital inflows to Asian emerging markets have been large and persistent, posing challenges for policy. The first challenge involves a macroeconomic dilemma that centres around the tension between appreciation pressures, inflation development, and growth prospect. The second stems from financial stability concerns associated with potential build-ups of macroeconomic imbalance, risk of asset price bubbles, and the possibility of an abrupt reversal of inflows.
Here, the challenge lies in selecting a set of indicators that can condition a timely policy choice, given the discrete nature of the instruments. To this end, we have put in place a macro-surveillance system to  2  BIS Review 141/2010  monitor vulnerabilities in seven key areas; namely, property market, stock market, banking sector, non-financial corporate sector, household sector, government sector, and external sector. Indicators are used to evaluate the build-up of vulnerabilities and imbalances in these sectors and the need for macroprudential measures is then assessed. This ultimately boils down to a judgement call. For us, integrating macroprudential measures in the overall macroeconomic modelling exercise to ensure a consistent and timely policy outcome remains a key priority. Finally, I want to come back to the point I raised earlier about the global nature of capital flows and the national orientation of policy. This is an important point and applies both to emerging markets and advanced economies. Simply put, the current cycle of capital flows has a strong international dimension as a key driving force of capital flows is the exceptionally low interest rates in the major economies. Hence, policy response by emerging markets is made more demanding if the problems at the source remain. Therefore, given the potential destabilizing influence that capital inflows may have on emerging markets, a question that must be asked is whether there are gains to be had for the global economy as a whole in moving away from exclusively domestic-oriented policies?