South Korea's top central banker on Monday stressed the role of central banks in promoting financial stability as they can enhance harmonization between macroprudential and rate policies.
"In order to achieve financial stability through the harmonization of operations between the two policies (macroprudential and monetary policies), it is essential for the various policy authorities to cooperate closely," Bank of Korea (BOK) Gov. Kim Choong-soo said in a keynote speech for a seminar on macroprudential and monetary policies.
"There is a global trend toward emphasizing the central bank's role in setting up an institutional framework to ensure seamless operation."
The governor said that as central banks are equipped with expertise in assessing economic conditions and the stability of financial markets, they can play a leading role in promoting financial stability as "systemic regulators."
His remarks came as the BOK has been granted a role in coping with financial instability since late 2011, in addition to its primary goal of keeping prices stable.
The passage of a related law set the stage for the BOK to work to prevent potential financial crises. Since 2010, South Korea has taken a set of macroprudential measures as the country had fallen victim to volatile capital flows whenever financial crises cropped up in the past.
The measures include regulations on banks' foreign exchange forward positions, levies on banks' non-core foreign liabilities and taxation on capital gains on bond investments by foreigners. Kim said that if macroprudential measures play their part in supplementing monetary policies, they could enhance credibility and transparency of central banks' rate policies.
Meanwhile, Charles Goodhart, a professor at the London School of Economics and Political Science, described the so-called Tobin Tax as "disaster," saying that there are risks of double taxation and increasing volatility in the foreign exchange markets. South Korea is mulling adopting taxation on bond or foreign exchange transactions or a tailored form of a Tobin Tax in a bid to curb excessive flows of foreign capital.