Summary of Challenges for Monetary Policy Conduct of Emerging Market Central Banks

After the financial crisis of 2008, policymakers, business professionals, and pundits realized how great an impact monetary policy has on the volatility of financial markets.  Since then, as evidenced by the deployment of unconventional monetary policy from advanced economies and their associated spillovers in countries around the world, crafting and implementing monetary policy has taken center-stage when it comes to discussing and addressing global economic challenges.

On Wednesday, October 5, 2016, the Governor of the Bank of Thailand, Veerathai Santiprabhob, led a talk titled “Challenges for Monetary Policy Conduct of Emerging Market Central Banks” that was co-sponsored by the Initiative on Central Bank and Monetary Policy directed by Patricia C. Mosser.  A subsequent discussion was led by Takatoshi Ito, Professor of International and Public Affairs, SIPA.

Governor Santiprabhob began his talk by describing the global economy as unstable, unbalanced, uncoordinated, and unsustainable.  He emphasized that rising income inequality in the wake of ongoing international conflicts has yielded geopolitical uncertainty that has collectively contributed to the global economy’s instability.  On imbalance, the governor iterated an enduring reality: the bulk of economic growth in the global economy is wrought by economic activities in emerging markets; however, despite such growth, advanced economies have each experienced anemic recoveries of varying degrees since 2008.  Governor Santiprabhob then highlighted that although the world is more integrated than it were previous decades, there exists little coordination between monetary policy and financial regulatory policy.  Further, he suggested that the heavy emphasis on fulfilling domestic mandates by governments, coupled with nearly a third of advanced economies trading government bonds held by central banks at negative nominal yields, underscores the unsustainable nature of the global economy.

“The only constant is change” Governor Santiprabhob prefaced, qualifying this old saying by characterizing the years since 2008 as a Great Transition—a transition that has inevitably reshaped the global economic and political landscape vis-à-vis three transitional forces: 1) a decline in word trade 2) the service sector’s contribution to growth, and 3) the “ultra-accommodative” monetary policies adopted by major advanced economies. 

Governor Santiprabhob articulated that the aforementioned forces “has had a profound impacts on the world over.” One of the more profound impacts of the transitional forces is that global bond yields and exchange rates’ sensitivity to expectations about monetary policy changes in advanced economies has overwhelmingly increased.  This sensitivity “put global markets on a knife edge” the governor remarked, and have ultimately made global financial markets more volatile.  Moreover, he described how a service-led growth has dampened investment, citing Uber and Airbnb as contemporary examples.

Governor Santiprabhob concluded his talk by outlining a pathway forward.  He proposed that central banks expand their set of policy tools and understand that “any one set of instruments is insufficient.”  Additionally, he encouraged emerging market countries to coordinate their monetary policy frameworks with each other and that of advanced economies.  Lastly, Governor Santiprabhob stressed that future monetary policy frameworks systematically take financial stability into account.

Before ending his talk, Governor Santiprabhob emphasized that “The onus on our generation is to ensure that transition leads us to a new and better place, rather than to more of the same."

Following the talk, a student observer and Program in Economic Policy Management Joint Japan World Bank Scholar remarked that "His delivery on navigating the great transition of global economy and the suggestions how central banks may respond from the perspective of emerging markets was so engaging. It was thoughtful and informative policy discussion about possible spillovers from conduct of monetary policy in advanced economy and how to overcome middle income trap is particularly relevant." 

Read the full transcript of Governor Santiprabhob's speech here.

Jerrel Baker MIA ‘17
Departmental Research Assistant