Their purpose is not to pledge some particular path of policy, independently of what happens to the economy. It’s to help people understand the dependence of policy on the economic outlook. The other form of guidance – sometimes called “Odyssean” – is quite different in this respect. It actively promises a certain path – in particular to keep interest rates very low – almost regardless of how things turn out. It’s a means of easing monetary conditions, and specifically  of lowering longer-term real interest rates, when the outlook for inflation is weak but the immediate policy rate is constrained by the lower bound (and if other alternatives like QE are for some reason unavailable or ineffective). If you’re able to convince people that, even in the event of a positive shock to inflation in the future, you won’t raise interest rates, this can push up expected inflation, thereby reducing the real forward rate of interest and encouraging more demand today. This “promise to be irresponsible”[4] won’t necessarily be believed because, when the time comes, and if there were subsequently some significant rise in inflationary pressure, the policymaker will be tempted to go back on the earlier promise and respond by raising interest rates. The optimal policy is intrinsically “time inconsistent”.
At last week’s 4th ASEAN Informal Summit in Singapore, ASEAN leaders launched an Initiative for ASEAN Integration or “IAI”. It is intended to narrow the divide between the older and newer members of ASEAN and enhance ASEAN’s competitiveness as a region. It is a framework for the more developed ASEAN members to help those members that most need help, and in so doing make ASEAN prosper. To kick it off, Singapore is offering a package of IT training and assistance in human resource development to Myanmar, Laos, Cambodia and Vietnam, while China, Japan and South Korea have also offered assistance that falls within IAI’s broad framework. Of course, ASEAN’s future depends as much on external factors as it does on these direct initiatives to promote intra-ASEAN trade and investment, and build up the economic strength of individual members. Our economies are highly dependent on international trade, and it is in our interest to work together actively for a freer, more stable and secure global trading environment. ASEAN therefore needs to support an open, stable multilateral trading system under the WTO, and the early launch of a new round of trade negotiations. Strong multilateral rules are the foundation for world trade, and protection against anarchic bilateral and unilateral trade policies. Small countries could not survive without them; even large economies would be much poorer off in a tit-for-tat environment. Hence ASEAN strongly supported the candidacy of Dr Supachai Panitchpakdi for the Director Generalship of the WTO.