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.
An important lesson learned from the current crisis is that price stability alone is not sufficient to ensure financial stability. Therefore, financial instability or crisis can occur even in the environment of stable prices and well-anchored inflation expectations. This implies that to ensure overall economic stability, central banks will need to go beyond the primary objective of price stability and to systematically embrace financial stability as another policy objective. The relevance of this dual mandate has become very clear in the last few years, in light of the global financial crisis, implying greater roles and responsibility for central banks. The second implication from the global crisis is that, under the new globalisation underscored by more integrated financial markets, the major source of risk and instability that central banks will have to deal with to ensure stability will be external. Typically, this includes the impulse on domestic inflation from global prices, especially fluctuations in commodity prices. Another is the risk to financial stability steming from unintended consequences linked to the spillover effects of policies implemented by other economies. But for most emerging markets at this time, the most serious external risk is the challenges posed by large and persistent capital inflows. The first challenge involves a macroeconomic dilemma that centres around the tension between appreciation pressures, inflation dynamics, and growth prospects. The second stems from financial stability concerns associated with potential build-ups of macroeconomic imbalances, risk of asset price bubbles, and the possibility of an abrupt reversal of inflows.