Abdul Rasheed Ghaffour: Bankers without borders Opening remarks by Mr Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Report Launch for East Asia and Pacific Region - Global Financial Development Report 2017/2018: Bankers without Borders, Kuala Lumpur, 12 April 2018. * * * Thank you for inviting me to speak at the launch of this very important report. The issue of globalisation has featured very prominently in the headlines, especially in recent times. In fact, it has been very trendy over the past decade to herald the end of financial globalisation and international banking. However, the fact that this topic keeps recurring, to me, is a testament that various issues remain unresolved. As such, I am pleased that we are able to have an informed discussion on this issue today. For my brief remarks, I will focus on the theme of the report “bankers without borders”. Finance and globalisation have been an important part of the ASEAN story The title of the report, lends to a very specific definition of the word borders, the conception of finance unrestricted by national boundaries. Conventional economic theory posits that capital will flow from capital rich to capital poor countries to fulfil the productive needs of the economy. This implies that any form of boundary is not only undesirable but may hinder growth.
One – perhaps extreme – characterisation of such robust control thinking starts from the adoption of a so-called MINIMAX strategy to monetary policy decisions.16 Even if it is too abstract to offer a practical guide to monetary policy, it can act as a device to help clarify some ideas underlying the policy debate. The MINIMAX approach involves choosing the policy setting which works best in the worst circumstances that you might face across the possibilities of how the economy behaves. More precisely, if we characterise uncertainty as being reflected in a set of different possible models of the economy, policymakers seek to minimise the welfare cost in that model where those welfare costs are highest, given the observed developments in macroeconomic data. The intuition here can be understood using a recent practical example. Most new Keynesian macroeconomic models have more than one steady state. But the inflation targeting literature originally focused on developments around one of those states, namely – and of course unsurprisingly – that defined by the inflation target itself. But in the face of deflationary risks and the aftermath of the global financial crisis, another steady state – one characterised by the zero lower bound on nominal interest rates, the liquidity trap and the threat of persistent deflation spiral – could no longer be ignored. Since this other steady state entailed lasting deviations from the inflation target, the threat of falling into it weighed heavily on central bank thinking.