Given the multifaceted risks posed by capital flows, policymakers must be able to avail ourselves of a broad range of policy instruments. These policy instruments include interest rate, exchange rate, macroprudential and capital flow measures. In deciding which instruments to use, we should avoid ruling out the use of any policy tools upfront. Rather, the choice of instruments needs to be tailored to the specific risks being managed and the circumstances the economy is facing. In addition, the choice of policy instruments also needs to be considered in an integrated manner to increase the efficacy of policies, minimise potential trade-offs, and avoid overburdening of any single policy tool. Finally, I would like to briefly touch on the role of SEG and SEACEN in dealing with this issue. Earlier, I mentioned the importance of surfers learning how to deal with all types of weather and wave conditions. What I did not mention is the fact that it is impossible for them to learn these skills individually. In Pro Surf Bali, one of the most popular surfing schools in Bali, surfers come together to share their experiences surfing in the toughest conditions, and in doing so, prepare each other for possible eventualities. The SEG forum on capital flows is in a unique position to achieve this objective. The forum can facilitate deeper awareness and understanding of member countries’ challenges in dealing with capital flows. The frank exchanges of experiences and policies will place member countries on a stronger footing when facing the next wave of capital flows.
Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power. Fifth, we must be aware of the gaps that still remain in our knowledge. Our mainstream macroeconomic models still have little to say, for instance, about the non-linear propagation of shocks, the distributional impacts of policies, or how endogenous firm entry and exit can affect economic performance.15 Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges. The changes that we have discussed, profound as they are, often hinge on one fundamental idea. A natural question to ask is whether such an idea sprang out as a response to a specific policy problem or was rather conceived previously in an entirely different, unrelated intellectual environment, perhaps addressing a different set of problems. It is a question that is especially relevant in economics, when previously held consensus views change. But it is a question that is unlikely to have a precise answer. Let me rather use the 1939 words of Abraham Flexner, the first director of the Princeton Institute for Advanced Study: “Almost every discovery has a long precarious history. Someone finds a bit here, another a bit there.