Monetary policy frameworks in EMEs: practice ahead of theory

Speech by Mr Claudio Borio, Head of the Monetary and Economic Department of the BIS, on the occasion of the Bank's Annual General Meeting, Basel, 30 June 2019.

BIS speech  | 
30 June 2019
by Claudio Borio
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  |  10 pages

Monetary policy frameworks in EMEs: practice ahead of theory (00:18:16)

Claudio Borio explains the particular challenges for emerging market central banks in setting monetary policy and the multiple tools they use.

Presentation slides

Emerging market economies (EMEs) have adopted inflation targeting but combined it with FX intervention rather than free floating - in contrast to what standard textbooks would prescribe. Practice has moved ahead of theory. Moreover, EMEs have complemented such monetary frameworks with macroprudential measures. The choice reflects EMEs' high sensitivity to capital flows and exchange rate fluctuations. This gives rise to potential policy trade-offs: it can make it harder to stabilise output and inflation at the same time and to reconcile macroeconomic stability today with macroeconomic stability tomorrow. FX intervention and macroprudential measures can improve these trade-offs. The frameworks have served EMEs well, although more work is needed to put the frameworks on a stronger analytical basis and to develop their implementation. The direction of travel is clear. And theory needs to catch up.