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 2: The Pursuit of Monetary and Financial Stability in Emerging Market Economies

Bandid Nijathaworn and Piti Disyatat

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


Bandid Nijathaworn and Piti Disyatat* INTRODUCTION 2.1 The attainment of monetary and financial stability is a goal at the forefront of policymakers’ agendas everywhere. Yet the route to this end and the challenges involved can be significantly different in emerging markets compared to more developed economies. This chapter discusses the underlying cause of these differences and highlights the key implications for how monetary and financial stability should be pursued in the emerging market context. Viewed from this broader perspective, it becomes clear that not only are short-term stabilization efforts fundamentally limited in their ability to deliver on this front, but they may even hinder the attainment of these goals over the long term. 2.2 THE UNIQUE CONTEXT OF EMERGING MARKET ECONOMIES The attainment of monetary and financial stability is something that policymakers everywhere place at the forefront of their agendas. Yet it is important to be reminded that they are only a means to an end. Monetary and financial stability are desirable only insofar as they are prerequisites for welfare-enhancing macroeconomic outcomes, and along this dimension, the context in which monetary and financial stability are pursued in emerging markets is quite distinct from that in developed economies. Thus in order to appreciate the challenges and practical aspects of managing monetary policy and financial stability in emerging economies, it is important to be aware of the key features that are unique to policymaking in this setting. A stylized fact regarding emerging markets is the significantly higher 22 The pursuit of monetary...

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