Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad
Chapter 2: The Pursuit of Monetary and Financial Stability in Emerging Market Economies
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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