Edited by James R. Barth, Chen Lin and Clas Wihlborg
Chapter 21: The Future of Financial Regulation: Reflections from an Emerging Market Perspective
Rakesh Mohan* 21.1 INTRODUCTION The world experienced the most severe financial and economic crisis in 2008–2009 since the Great Depression. Although the crisis originated in the subprime mortgage market in the United States, it then spread to Europe and later to the rest of the world. The speed of the contagion that spread across the world was perhaps unprecedented. What started off as a relatively limited crisis in the US housing mortgage sector turned successively into a widespread banking crisis in the United States and Europe, the breakdown of both domestic and international financial markets, and then later into a full-blown global economic crisis. Interestingly, however, although the emerging market economies (EMEs) in Asia and Latin America also suffered severe economic impacts from the crisis, their financial sectors exhibited relative stability. No important financial institutions in these economies were affected in any significant fashion. So this crisis should really be dubbed the North Atlantic financial crisis rather than a global financial crisis. In any case, the fallout from this financial crisis could be an epoch-changing one for central banks and financial regulatory systems. The crisis occurred after an extended period dubbed the ‘Great Moderation’, a period characterized by high global growth, huge financial sector expansion and low product price inflation, but accompanied by steep growth in monetary aggregates and asset prices, along with volatility in exchange rates. The prevailing monetary policy orthodoxy was inflation targeting or variants thereof, and light-touch financial regulation. The price that the world has paid...
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