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Economic surveillance after the crisis: Reflections from a small full-service central bank

The global financial crisis has changed the economic surveillance required by central banks, placing a greater emphasis upon using monetary policy and financial stability policy in tandem to help keep economies stable.

This is the message of a speech by Reserve Bank Governor Dr Alan Bollard, to be delivered in Singapore tonight by Assistant Governor Dr John McDermott.

Dr Bollard's speech, presented to the Sim Kee Boon Institute Conference on Financial Economics, states that prior to the crisis there was a clear separation between monetary policy formulation and financial stability policy, even in "full service" central banks like the Reserve Bank that perform both functions.

However, the financial crisis challenged traditional economic forecasting models and moved central banks to pay greater attention to financial market information when formulating monetary policy.

"Likewise, more attention is paid to economic imbalances and the financial health of sectors, by looking at household and business balance sheets, when assessing financial sector risks," Dr Bollard says.

"Going forward, the aim is to set monetary and financial policy instruments to take account of the inter-relationship between the financial sector and the real economy. This will require a broader framework for economic surveillance."

Since the crisis, information is being swapped more readily between central banks and regulators globally, and relations with treasuries and Ministers of Finance have become closer.

The Reserve Bank has also strengthened links with regulators in other countries, particularly Australia and Asian central banking partners, to help information sharing.

"Good surveillance usually will not stop nasty surprises, but it may buy some lead time and help policymakers to make better sense of surprises when they happen," Dr Bollard says.

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