The influence of external factors on monetary policy frameworks and operations

BIS Papers No 57
October 2011

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. 

JEL classification: E42, E44, E52, E58, F31, F34, F36, F42, F53, G21, G28, P52

BIS background papers

How have external factors affected monetary policy in the EMEs?
International banks, new liquidity rules and monetary policy in EMEs
Exchange rates and monetary policy frameworks in EMEs
Foreign exchange market intervention in EMEs: implications for central banks
Annex: Alternative central bank policy instruments

Contributed papers

External factors and monetary policy
Issues in cross-border funding of Chilean banks
China's exchange rate and monetary policies
Monetary policy and the exchange rate in Colombia
Long-run equilibrium exchange rate notions in monetary policy strategies: the case of the Czech National Bank
Loan-to-value ratio as a macroprudential tool - Hong Kong SAR's experience and cross-country evidence
Monetary policy challenges during the crisis in a small open dollarised economy: the case of Hungary
External factors and monetary policy: Indian evidence
The equilibrium real exchange rate for Israel
Characteristics of international banks' claims on Korea and their implications for monetary policy
Financial market depth: friend or foe when it comes to effective management of monetary policy and capital flows?
Global liquidity, capital flows and challenges for policymakers: the Mexican experience
Capital flows, monetary policy and forex intervention in Peru
External factors and Philippine monetary policy
The role of the exchange rate in monetary policy in Poland
Exchange rate flexibility and Russia's monetary policy shift
Monetary policy in Saudi Arabia
Recent developments in the Singapore economy
Monetary policy in the post-crisis world: the perspective from Thailand
Capital flows in the post-global financial crisis era: implications for financial stability and monetary policy