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Monetary Policy Frameworks in Asia : Experience, Lessons, and Issues

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  • Peter J. Morgan

    (Asian Development Bank Institute (ADBI))

Abstract

This paper analyzes the evolution of East Asian monetary policy frameworks over the past two decades, chiefly in response to shocks from the Asian financial crisis of 1997–1998 and the global financial crisis (GFC) of 2007–2009. The Asian financial crisis showed the importance of exchange rate flexibility and credible policy frameworks, leading to increased central bank independence, greater focus on inflation policy and more flexible exchange rates. A key lesson of the GFC was the importance of containing systemic financial risk and the need for a “macroprudential†approach to surveillance and regulation that can identify system-wide risks and take appropriate actions to maintain financial stability. Emerging economies face particular challenges because of their underdeveloped financial systems and vulnerability to volatile international capital flows, especially “sudden stops†or reversals of capital inflows. The paper reviews the history of East Asian monetary policy frameworks since 1990; describes current monetary policy frameworks, including issue of price versus financial stability for a central bank and the policies a central bank can use to manage financial stability; the monetary policy transmission mechanism based on financial linkages and financial deepening; assesses policy outcomes including inflation targeting and responses to the “Impossible Trinityâ€; and makes overall conclusions. The paper finds that East Asian central banks have generally managed inflation and growth well over the past decade, but the difficulties faced by central banks of advanced countries in the aftermath of the GFC suggests that not all problems have been solved yet.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23639.

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Date of creation: Sep 2013
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Handle: RePEc:eab:macroe:23639

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Related research

Keywords: Monetary policy framework; Asia; Asian financial crisis; central bank independence; Capital Inflows; inflation policy;

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References

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  1. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
  2. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
  3. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers.
  4. Ila Patnaik & Ajay Shah, 2010. "Asia confronts the impossible trinity," Macroeconomics Working Papers 22973, East Asian Bureau of Economic Research.
  5. Jonathan David Ostry & Mahvash Saeed Qureshi & Karl Friedrich Habermeier & Dennis B. S. Reinhardt & Marcos Chamon & Atish R. Ghosh, 2010. "Capital Inflows: The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  6. Ashok Bhundia & Mark R. Stone, 2004. "A New Taxonomy of Monetary Regimes," IMF Working Papers 04/191, International Monetary Fund.
  7. Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2009. "Inflation Targeting Framework: Is the story different for Asian Economies?," MPRA Paper 19546, University Library of Munich, Germany.
  8. Jeffrey Carmichael & Michael Pomerleano, 2002. "The Development and Regulation of Non-Bank Financial Institutions," World Bank Publications, The World Bank, number 15236, January.
  9. Inoue, Takeshi & Toyoshima, Yuki & Hamori, Shigeyuki, 2012. "Inflation targeting in Korea, Indonesia, Thailand, and the Philippines : the impact on business cycle synchronization between each country and the world," IDE Discussion Papers 328, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  10. Morgan, Peter, 2009. "The Role and Effectiveness of Unconventional Monetary Policy," ADBI Working Papers 163, Asian Development Bank Institute.
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