Bandid Nijathaworn: Challenges for central banks in the new globalisation Remarks by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the Bank of Thailand International Symposium 2010 “Challenges to Central Banks in the Era of the New Globalisation”, Bangkok, 15 October 2010. *  *  *  I think it is clear from the discussion we had that the post-crisis global economy will not be the same as the one we remember three or four years ago. The global financial crisis was serious, causing much dislocation to the global economy, the banking sector and financial markets, and the process of regaining full normality will take time. Therefore, at least for the next few years, the post-crisis global environment will be characterized by a world of two halves: the advanced economies and emerging markets, each exhibiting different growth prospects, different economic challenges, and different policy stance. And it is this divergence in policies and performance that will drive uncertainty and volatility in global financial markets, accompanied by shifts in risk appetite, global asset allocation, and relative prices. This, in essence, is the context in which new challenges for central banks are being shaped. What implications will this post-crisis environment have on central banks’ roles and responsibilities in maintaining economic stability? To me, three implications are clear. The first is the need for central banks to expand their mandates to formally recognize both price and financial stability as their core policy objectives.
The sensitivity criterion states that although near- and medium-term inflation expectations may respond to economic shocks, expectations of inflation far in the future should not. Well-designed monetary policy will generally allow for some response to shocks of short- and medium-term inflation expectations in order to balance competing objectives, but long-run inflation expectations should not be affected. In a formal sense, this criterion is about the very long-run response of inflation to shocks, but as shown in my research with Orphanides, the beneficial effects of anchored expectations on macroeconomic performance only occur when the inflation response to a shock is not expected to extend over many years. As Keynes admonishes us, in the long run we are all dead, and the notion of long-run expectations cannot be too long. This sensitivity criterion requires long-run inflation expectations to be invariant to shocks. In contrast, the level criterion applies the more stringent standard that the rate of long-run inflation expectations be consistent with the central bank’s long-run inflation target. In other words, it demands that expectations not just be anchored, but anchored to the right spot. These first two criteria are present in the FOMC’s statement on Longer-Run Goals and Monetary Policy Strategy, which stresses the anchoring of longerrun inflation expectations at the target level and recognizes that short-run trade-offs between inflation and economic activity may arise. The third criterion—uncertainty—requires that uncertainty about future inflation increases less than linearly with the forecast By continuing to use our site, you agree to our Terms of Use and Privacy Statement.