Dimitar Bogov: Policy nexus and the global environment – a new consensus emerging from the crisis?
Dimitar Bogov: Policy nexus and the global environment – a newconsensus emerging from the crisis?
BIS Central Bankers Speeches
Address by Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia,at the 2nd Research Conference “Policy nexus and the global environment – a newconsensus emerging from the crisis?”, Skopje, 26 April 2013.
Ladies and Gentlemen,
Let me wish you welcome on our second Research Conference that we usually organize onthe day of the monetary independence anniversary of the Republic of Macedonia. Thesubject of this year’s conference we believe is highly topical, in line with the ongoing livelydiscussions among central bankers, research and academic institutions worldwide.
The global economy in the last couple of years undergone remarkable changes, both frominstitutional and policy design setup. We witnessed financial market turbulences, banksfailures and sovereign debt crisis with strong contagion around the world economy that wasalmost unique by its size, and the global economy is still struggling to recover. After fiveyears of global crisis we could say that we experienced a lot, and hopefully, we learnt a lot.One of the main lessons of the crisis was exactly related to the topic of the conference – theneed of policy nexus as a kind of a consensus emerging from the crisis.
What is the policy nexus about?
At the initial stage of the financial crisis the importance of the macro prudential policies in theoverall policy mix was highlighted and therefore, a lot of attention has been put on themonetary and macro prudential policy nexus, conveying the main message that the pricestability and financial stability are interconnected. With the appearance of the sovereign debtand banking crisis in the last couple of years in the euro area, it was quite obvious that thepoor public finances management could also impose threats to the financial system. Thefinancial instability and weak public finances can potentially have adverse effects on thefinancial markets, imposing distortions in the monetary policy transmission mechanism, andresulting in serious macroeconomic imbalances. The required policy nexus is becoming anecessary precondition for designing and implementing a sound macroeconomicmanagement.
Under situation that was more specific than usual, when the role of traditional instrumentswas limited, the monetary policy turned to unconventional policy measures. Although themonetary policy in the region has not been constrained by zero lower bound on interestrates, the central banks also turned towards unconventional monetary policy tools, having inmind the potential risks of repeated deterioration of the external imbalances and inflationarypressures or aiming at supporting other objectives (including credit growth). While listing theexperiences of unconventional measures among the central banks, we can distinguishbetween: measures for increasing and changing the composition of the assets in the balancesheet of the central banks in different forms and with high heterogeneity across the countries,and measures for influencing agents’ expectations by strong commitment by the centralbanks for keeping low interest rate for a longer time horizon.
In the public finances domain, the strengthening of fiscal discipline and the need of carefulmonitoring of fiscal sustainability can be taken as the core preventing arms against fiscalimbalances that highlight this crisis. The fiscal consolidation is already on the list ofobjectives within the EU and it will require serious efforts and internal adjustments forreaching this goal. In the midstream of the crisis, the need of fiscal adjustment imposed theconfronting issue of the adverse impact over recovery and growth dynamics that was really
one of the tight spot in the crisis management. The fiscal stimulus obviously supported therecovery in the countries where there was a room for it, but looking forward, the need forfiscal consolidation should be taken seriously.
The financial stability, not only nationwide, but also in international framework, is quite oftenquoted as a common good. Attention should be paid to the risk distribution among financialinstitutions, as well as to the aggregate risk level evolution. The regulatory response to thecrisis was oriented towards strengthening the banks’ soundness as well as designingtreatment of systemically important banks which certainly require a special attention by theauthorities. Systemic risk requires systemic and comprehensive solutions, including changesin the institutional setup. In the EU it was done by establishing crisis managementmechanisms, strengthened governance aimed to monitor and prevent against anymacroeconomic imbalances, as well as to move towards the banking union. The EU memberstates and institutions face many challenges when making the new institutional setupoperational and when making the necessary adjustments in a reasonable time framework. Inaddition, all other countries face the challenge of converting the lessons from the crisis intopolicy actions.
The changing role of central banks
During the crisis, the role of the central banks moved from traditional way of monetary policyimplementation towards combining the monetary and financial stability objectives, both beingcomplementary components of macroeconomic stability. The set of instruments becamemore complex because of the unconventional measures, designed to bridge the period ofextraordinary circumstances affecting the effectiveness of standard instruments, and aimingto strengthen the financial stability or economic recovery. Due to the variety of thoseunconventional measures across the countries, it is still difficult to assess their impact,although the experiences of countries could confirm the quite largely accepted consensusthat the "monetary stimulus" really supported the economy. However, we should be awarethat at one point in the future their contribution will be overwhelmed and we will need to takeappropriate action on time in order to impede any reverse effects.
In the policy design and decision making process under the current dynamic environment,the strengthening of analytical tools and the enhancement of knowledge on the policy nexusare extremely important. The interplay of monetary, fiscal and macro prudential policies is aquite new area, seeking for deeper research work to support the decision making process atthe central banks and other policy makers, to provide appropriate advices and policyrecommendation and therefore, to prevent from underlying risks. The aim of our conferenceis to contribute towards building knowledge and exchanging views on the policy nexus issue.Having in mind the quality of papers that are going to be presented today, I truly hope thatwe will make our contribution towards this aim.
I wish you a successful conference and fruitful discussion!Thank you.