Norman T L Chan: Domestic and international dimensions of unconventional monetary policy Opening remarks by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the Conference on “Domestic and International Dimensions of Unconventional Monetary Policy”, organised by the Hong Kong Monetary Authority and the Federal Reserve Bank of New York, New York City, 20 March 2014. *  *  *  Mr McAndrews, Professor Sims, Professor Woodford, ladies and gentlemen, 1. A very warm welcome to all of you for attending today’s Conference jointly organised by the Federal Reserve Bank of New York and the Hong Kong Monetary Authority. This Joint Conference is very timely, as it is neither too early nor too late to examine the effects of the Unconventional Monetary Policy (UMP) of the Fed, including its spill-over effects on the emerging market economies (EMEs). As we all know, the Fed has already started tapering and, if everything goes according to plan, would end the asset purchase programme by the end of this year. The Fed has made it very clear in its external communications that tapering is not tightening and that there would likely to be a gap between the end of QE and the actual tightening of policy interest rates. However, the market considers that we are now in the phase of “exit” from the UMP, which also marks the beginning of the normalisation of US interest rates.
But how do we explain the episode of the sell-off this January when the market already knew in December that tapering would proceed? 3. Conceptually, it is not very difficult to understand the spillover effects of the UMP on EMEs in the five years after 2009. There was the first phase of spill-over, which entails a period of heavy capital inflows, through the banking and bond market channels, to the EMEs. This was a “happy” phase of the spill-over of UMP because the EMEs basically enjoyed apparently pleasant outcomes in investment, consumption, job creation and economic growth. At the same time, EME currencies appreciated and their foreign reserves increased. However, this period also saw the build up of vulnerabilities in the EMEs. The inflow of capital, including the carry trade in search of yields, created easy monetary conditions, which encouraged rapid credit expansion amongst the households and corporates. While domestic consumption and investment became buoyant, most EMEs experienced a significant deterioration of their current account positions. Needless to say, inflationary pressure and overheating in the asset markets also built up in most EMEs. This was why some EMEs, Hong Kong included, have introduced macroprudential measures to tackle the spill-over  BIS central bankers’ speeches  1  effects of the UMP of advanced economies. While it is too early to tell whether these macroprudential measures were effective, the EMEs seem to be entering the second phase, which I would call the “unhappy” period, of the spill-over.