Monetary Policy Frameworks for Emerging Markets

Monetary Policy Frameworks for Emerging Markets

Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad

Financial globalization has made monetary policy formulation in emerging market economies increasingly complicated. This timely set of studies looks at the turmoil in global financial markets, which coupled with volatile inflation poses serious challenges for central banks in these countries. Featuring papers from the research frontier and front-line policymakers in developing and emerging market economies, the book addresses questions such as ‘What monetary policy framework is most suitable for these countries to confront the new challenges while they continue to open up to trade and financial flows?’, ‘What are the linkages between monetary stability and financial stability?’ and ‘Is inflation targeting or a fixed exchange rate regime preferable for developing and emerging markets?’

Chapter 1: Monetary Policy Challenges for Emerging Market Economies

Gill Hammond, Ravi Kanbur and Eswar Prasad

Subjects: development studies, development economics, economics and finance, development economics, money and banking

Extract

* Gill Hammond, Ravi Kanbur and Eswar Prasad INTRODUCTION 1.1 Emerging market economies have now become one of the most dynamic and economically important groups in the world economy. As these economies become larger and more integrated into international trade and finance, they face an increasingly complex set of policy challenges. Given their important role in the world economy in terms of population and sheer economic size, addressing these challenges effectively has important economic, social and political implications even beyond their national borders. Monetary policy is typically the first line of defense against a number of internal and external shocks that these economies are now exposed to, so it is important to get it right. However, emerging market economies face a number of difficult challenges in designing monetary policy frameworks that work well in terms of promoting monetary and financial stability. Despite their rising economic might, many emerging market economies still have relatively underdeveloped financial markets and institutions, per capita incomes that still lag far behind those of advanced industrial economies, and a significant fraction of their population are still living in poverty. This puts a number of constraints on the effective formulation and implementation of macroeconomic policies. Does existing economic theory provide lessons that are pertinent for designing effective monetary policy frameworks in emerging markets? What can be learnt from cross-country studies and from experiences of individual countries that have adopted different approaches? While country-specific circumstances and initial conditions matter a great deal in formulating suitable frameworks, are there clear...

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