The higher the participation of non-residents in the bond market, the more vulnerable the market is to volatile portfolio outflows. So it is said that with history, if we learn it well, will not repeat itself. Nevertheless, sometimes lessons in history are cloaked in apparent success. The 2008 Global Financial Crisis and corresponding policy responses by major central banks caused risks not seen before. In the periods after, unconventional monetary policy and a prolonged period of low interest rates had negative spillovers to emerging markets. This was notably evident through the waves of volatile capital flows in large magnitude. These flows were drawn by the search for yields, and ironically coincided with a significant expansion and development of our financial markets, a key reform measure following the AFC. The region was once again at the mercy of global easy money, flattered with an overvaluation of asset prices and domestic financial market exuberance. As these capital inflows mainly originated from the advanced economies, regional financial markets became increasingly exposed to their vagaries. Take the Taper Tantrum for example, which exemplifies how fragile the region’s fate is when just a hint of the US Fed possibly tapering its asset purchases was sufficient to trigger massive 2/5  BIS central bankers' speeches  capital outflows from the region. Time and again, a clear policy lesson has come to the fore – the importance of diversification and the need to reduce reliance on the de facto reserve currencies to manage negative spillover effects.
Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired. The goal is the maximum sustainable level of employment – in other words, the most job opportunities for the most people over the long run. Some of you may be wondering whether the risk of a recession isn’t already quite high? And, if so, doesn’t this imply a need for special care in adjusting monetary policy? After all, the current economic expansion is more than six years old – a bit long in the tooth by post-war standards. Even so, recession risk did not play a major factor in my thinking. Economic expansions don’t simply die of old age. They primarily end either because monetary policy is kept too loose for too long, thereby necessitating a subsequent sharp tightening in monetary policy to prevent a significant inflation overshoot, or because some large adverse shock hits the economy that the central bank cannot easily offset. Mitigating the first risk of being forced to choke off the expansion argues for getting started with policy normalization now rather than holding off. With respect to the second risk of unanticipated shocks, this is obviously very difficult for the central bank to insulate the economy from.