Evolving international financial markets: some implications for Central Banks

Internationally integrated capital markets can have significant effects on the way central bankers pursue both monetary (macroeconomic) and financial stability. With respect to the former, countries are being pushed into corner solutions of either "immutably" fixed exchange rates or floating. While the proper choice depends on a country's circumstances, no regime is without its own problems. In this paper, some of the practical implications of floating are highlighted; in particular, how adoption of such a regime affects the transmission mechanism of monetary policy and the problems posed by volatile exchange rate expectations. As for the pursuit of financial stability, central bankers and other regulators must increasingly recognise the international dimension in their efforts to promote the health of financial institutions, financial markets and the infrastructure (legal, payment systems, etc.) which supports them. This international dimension affects the nature of the prudential policies adopted as well as the processes through which they are agreed. Finally, recognising that monetary stability and financial stability are two sides of the same coin (witness Mexico in 1995 and South Asia more recently), the paper concludes with some preliminary reflections on possible interactions between monetary and prudential policies in an internationally integrated world.