Financial market development, monetary policy and financial stability in emerging market economies

The papers in this volume were prepared for a meeting of senior officials from central banks held at the Bank for International Settlements.

Financial markets are an important component in the transmission of monetary policy and play a key role in fostering financial stability. Financial market development (FMD) aims at enhancing the capacity of the financial system to pool domestic savings and foreign capital in funding investment and consumption, and at enabling efficient risk-sharing. Deep and liquid markets promote transparent and efficient pricing of assets, attract a diverse investor base, and help transfer risk to parties willing and able to bear them. This volume contains papers that were originally prepared for a meeting of Deputy Governors of central banks from emerging market economies (EMEs), exploring issues related to FMD and its interaction with, as well as implications for, the conduct of monetary policy and financial stability.

Several of the papers offer insights into the changing nature of interactions between monetary policy and financial markets in EMEs. They discuss how market development influences the choice of policy targets and instruments, as well as the efficiency of domestic monetary transmission. They also discuss the importance of global factors in shaping domestic monetary conditions and how FMD has enabled central banks to extract useful information from financial markets.

Another area covered by the papers in this volume relates to the financial stability implications of FMD. They point to the benefits of more developed markets in terms of enhanced resilience and efficiency in providing new tools to raise funds and manage risks, as well as to the risks associated with high foreign investor participation, growing private sector foreign currency debt levels and the growing role of non-bank financial institutions. The papers raise several policy challenges such as developing hedging markets, improving monitoring of FX flows, and implementing macroprudential tools and FX intervention.