The influence of external factors on monetary policy frameworks and operations

Economic and financial integration has reshaped the monetary policy frameworks and transmission channels in the emerging market economies (EMEs) over the past two decades. Economic and financial linkages have become stronger, resulting in greater synchronisation of business cycles across advanced and emerging market economies. This has led to the faster transmission of shocks, especially through financial channels. Against this background, the 16th annual meeting of Deputy Governors from the major emerging market economies, held at the BIS in Basel in February 2011, addressed the question of how external factors had affected monetary policy in EMEs over the past few years. The present volume brings together papers prepared for that meeting. The discussion was organised around four broad topics: (i) international banks, new liquidity rules and monetary policy in EMEs; (ii) exchange rates and monetary policy frameworks in EMEs; (iii) the implications of foreign exchange market intervention for central bank balance sheets; and (iv) additional supporting policies that central banks can use to address the policy dilemmas from the influence of external factors. One of the main conclusions of the meeting was that financial globalisation has multiplied the number of transmission channels and associated risks through which external factors influence domestic economic and financial conditions in EMEs. This complicates the assessment of the outlook for inflation and growth. It also introduces an additional dimension - the evaluation of financial stability risks - to the objectives of central banks. Monetary policy in EMEs has become much more complex as a result.