Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad
Chapter 1: Monetary Policy Challenges for Emerging Market Economies
1. Monetary policy challenges for emerging market economies* 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...
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