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 7: The Nexus between Monetary and Financial Stability: The Experience of Selected Asian Economies

Sukudhew Singh

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


* Sukudhew Singh INTRODUCTION 7.1 The chapter looks at the episodes of monetary and financial instability since the 1980s in five Asian economies – Indonesia, Korea, Malaysia, the Philippines and Thailand – and provides a summary of some of the factors that were important in creating these instabilities. It also attempts to look at common themes across countries as well as the nexus between monetary and financial instability in these countries. A final section looks at the changes in the financial systems of these countries since the Asian financial crisis in 1997 and makes an assessment of their vulnerability to further episodes of instability. The main finding is that unlike the 1980s, when episodes of monetary and financial instability tended to be largely due to domestic factors, during the 1990s increased financial globalization led to capital flows playing a larger role in generating the imbalances that ultimately resulted in episodes of monetary and financial instability in these countries. A second finding is that monetary instability played an important role in creating the conditions that resulted in financial instability, and once financial instability had set in, it became harder to restore monetary stability. The experience of the Asian financial crisis shows that an approach that coordinates the monetary and financial policy response to such episodes has the greatest likelihood of resolving such problems in the shortest time period and in the least costly manner. A third finding is that despite the improvement in the economic fundamentals, stronger institutions, more robust prudential and supervisory frameworks,...

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