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BOK chief says financial stability matters in small open economies.

Bank of Korea (BOK) Governor Lee Ju-yeol said Tuesday that central banks of small open economies need to pay more attention to financial stability when they implement monetary policies, as they are vulnerable to capital outflows and currency depreciation.

The nation's chief central banker admitted that it was time to keep an accommodative monetary policy to boost the sluggish economy, but the importance of maintaining stability in financial markets should not be neglected.

"First, in our conduct of monetary policy we should pay special attention to financial instability risks, while supporting the recovery of economic growth," said Lee in his welcoming address at a conference co-hosted by the BOK, the Korea Institute for International Economic Policy and the U.S.-based Peterson Institute for International Economics.

His remarks come amid the phenomenon of small open economies, including Korea, coming under pressure to keep a balance between easing their monetary policies and the side effects stemming from this. The Korean economy, the fourth largest in Asia, is regarded as a small open economy for its heavy dependence on exports and massive foreign investment in its equity market.

Lee said that international cooperation can help small open economies lower risks of financial instability by providing safety nets for each other when they face crises. He took as examples the International Monetary Fund's New Arrangements to Borrow, U.S. dollar currency swap arrangements and the Chiang Mai Initiative Multilateralization Fund for such measures that can be implemented in emergencies.

Oliver Blanchard, a senior fellow at the Peterson Institute, discussed spillovers from U.S. monetary policy to emerging markets. He said that for emerging economies capital control is more efficient to control spillovers from major economies rather than directly getting involved in foreign exchange markets.

Emerging markets, such as India and Brazil, have complained of the easing monetary policies of the U.S., the European Union and Japan, which they believe are causing dangerous asset bubbles in their countries.

In the seminar, participants also exchanged their views on relations of financial market openness and economic growth and monetary policy independence among others. Participants included Swiss National Bank Chairman Thomas Jordan, Bank of Israel Governor Karnit Flug and Peterson Institute President Adam Posen.

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Publication:The Korea Times News (Seoul, Korea)
Date:Jul 19, 2016
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