Coherent policy framework will enhance macroeconomic and macro-financial stability: Ravi Menon

DEVELOPING effective policy instruments and using them in a coherent fashion will improve macroeconomic and macro-financial stability, making financial globalisation safer, said managing director of the Monetary Authority of Singapore (MAS), Ravi Menon.

This comes at a time "when there are growing risks of fragmentation in international economic relationships," added Mr Menon, who was giving his opening remarks on Wednesday at the virtual Asian Monetary Policy Forum (AMPF) and MAS-Bank for International Settlements (BIS) Conference on Macro-Financial Stability.

In his speech, Mr Menon highlighted that the traditional inflation targeting framework for monetary policy is now coming under pressure as emerging market economies (EMEs) - grappling with huge and volatile international capital flows - have had to turn to various other policy tools to achieve macro-economic and macro-financial stability. Large and volatile capital flows can be "disruptive for EME financial markets which are typically not deep enough to smoothly intermediate the flows."

At the same time, advanced economies are also looking at macroprudential measures to promote financial stability as they face increasing leverage and growth in financial assets amid the low interest rate environment, Mr Menon pointed out.

Faced with large capital flows, EME central banks have had to experiment with tools such as foreign exchange intervention, macroprudential policies and capital flow management measures.

"There is now a rich body of policy experiences, especially in emerging Asia, crying for a theoretical framework," he said. "We need a framework that provides coherence, not only across these various policy tools, but also with traditional monetary and fiscal policies."

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While policymakers have typically used different instruments to achieve different outcomes - such as using macroprudential measures for financial stability - policies can have overlapping effects, he pointed out.

"An integrated policy framework needs to provide greater clarity on these interactions," he said, adding that a deeper understanding is needed of how these instruments complement, substitute or conflict with each other.

"An integrated policy framework could perhaps shed light on the circumstances under which monetary policy could also serve financial stability objectives, and whether there are benefits to jointly caliberating monetary policy and macroprudential policy, as well as how this calibration should be done," Mr Menon went on to say, adding that both the BIS and International Monetary Fund have been carrying out research on these issues.

Taking place virtually, the AMPF kicked off on Wednesday, marking its eighth year, and will conclude on Friday.

The forum will look at macro-financial stability frameworks and highlight advanced as well as EMEs' experiences with monetary, macroprudential, exchange rate and capital flow management policies.

Attendees include central bank governors, senior officials and academics, while speakers include Professor Anil Kashyap, Stevens Distinguished Service Professor of Economics and Finance at the University of Chicago Booth School of Business, who delivered the keynote address.