木瓜影院 Group Young Malaysian Researcher Prize 2016 was awarded to Tng Boon Hwa, Senior Economist at Bank Negara Malaysia, for best research paper on development policy. In this interview, he talks about the impact of financial crises and how to prevent or mitigate its effects.
Question: You have written on financial stress and crisis. Why do you think this is an important topic for research and policy analysis?
Boon Hwa: The first time I became aware of financial crises was in April 2007. Back then, things were starting to get worse in the United States and Europe. There were lots of studies starting to come out, which looked at the historical experiences of financial crises and its devastating effects. This included statistics showing that recoveries from crises are very prolonged with very severe displacements in the labor market leading to large income losses.
It’s shocking to see this happening once every 10-15 years. For me, the frequency of crises puts forth a very strong case to have a financial market surveillance system within policymaking institutions. One that can detect a crisis from when it starts in its nascent stages to when it becomes a full blown crisis to when it starts to recede. The reason we want this is so that at every stage of the crisis the policy response will be fine-tuned according to the needs of the financial system and the needs of the real economy.
Question: What can be done to prevent or mitigate the effects of financial crises?
The research finds that before a crisis erupts, it actually happens gradually over time. However, there is a tipping point after which things happen very quickly. When this happens the effect it has on confidence and liquidity is very sudden. The paper finds that an aggressive and quick policy response is needed. There is no one size fits all solution in terms of policy but there needs to be policy to restore stability in the financial system so that it can play its role in intermediating credit and liquidity so that real economic activity can resume. A challenge for policy is to restore confidence so that risk aversion doesn’t hold back spending by the private sector.
Question: What do you think about the need for policy coordination across countries and the role of central banks during a financial crisis?
Financial crises tend to be more severe when there’s a regional dimension to it, when a crisis from one country spreads to other countries. During the global crisis, there was a lot of policy coordination amongst central banks to provide US dollar liquidity in the easing of monetary policy. To a big extent this helped provide a signal to financial markets that big institutions are taking note of the severity of the crisis and acting on it. The other aspect of regional cooperation that is really important is that as a country’s financial system develops and becomes big and looks to expand to other countries, surveillance of institutions need to involve cooperation across borders.
Question: How do you feel to have won this award and what do you hope will be the impact on people?
I am very happy as this is the inaugural award and I certainly appreciate the recognition. It would be great if this research generates more interest in an area that I regard to be really important. Financial crises have very persistent effects as it has very long run, detrimental consequences on the welfare of people. There is a very strong case for a lot more research to be done that can help contribute to this policy discussion.
