‘Integrated policy framework’, not monetary policy alone, needed for price and financial stability: Ravi Menon
Janice Heng
SECURING both price stability and financial stability cannot be done through monetary policy alone, but requires integration with other policy areas, said Monetary Authority of Singapore (MAS) managing director Ravi Menon on Friday (May 26).
Speaking at the 10th Asian Monetary Policy Forum at Shangri-La Singapore, he advocated an integrated framework of monetary policy, fiscal policy and macro-financial measures. These include foreign exchange intervention, capital flow management, and macro-prudential measures such as loan-to-value limits on property.
This approach recognises that “policies that are independent in execution are often interdependent in their effects”, Menon said.
And achieving such policy coherence “is key to minimising the risk of repeated bouts of financial and economic crises feeding on each other”, he told an audience of policymakers and academics.
An integrated policy framework was one of four propositions he set out for achieving both price and financial stability.
The experience of the last decade has underscored the importance of considering both types of stability, he noted, as ultra-easy monetary policy heightened risk-taking far more in the financial sector than in the real economy.
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There may also be a short-term trade-off between price stability and financial stability, he added. Monetary policy changes affect sentiment and risk premiums, and tightening could trigger “contagious financial failures”.
“Monetary policy is simply too blunt an instrument to address excessive risk-taking and leverage at the sectoral level,” said Menon.
His second proposition was that financial sector vulnerabilities are best addressed using a variety of macro-financial tools.
These include macro-prudential measures – not just general countercyclical capital buffers, but also targeted moves such as loan-to-value limits and debt-service limits in the property market.
These are more effective if taken pre-emptively, rather than in response to shocks, he added.
His third proposition was that monetary policy should remain focused on achieving price stability, but must take into account the implications for financial stability.
Highly expansionary monetary policy over a prolonged period could cause the “build-up of financial system vulnerabilities”, Menon said.
One approach might be for central banks to “take time to bring inflation back to target”, to take the financial consequences into account, he said. But the trade-off is that high inflation will persist for longer.
His final proposition was that fiscal policy plays an important role, not least in ensuring the sustainability of public debt.
Tax or expenditure measures are also useful because they can “either alleviate or accentuate effects” on specific sectors or groups of people.
For instance, transaction taxes on property purchases can complement macro-prudential measures to tackle asset price inflation. At the same time, targeted support can be provided to the most vulnerable groups.
Singapore does not have a formal integrated policy framework, but does have an “intuitive” policy coherence, he said. Consultations across policymaking bodies and a common ethos has enabled this without formal coordination.
The forum, which began on Thursday evening, focuses on the challenges for monetary policy in the current macroeconomic and financial landscape.
It is an annual flagship policy research event of the Asian Bureau of Finance and Economic Research, University of Chicago Booth School of Business, National University of Singapore Business School and MAS.
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