Again, the cases of Japan and the great depression testify this observation.5 Policy uncertainty over the appropriate policy actions has recently heightened. The policy uncertainty is associated with the question of appropriate mix of demand and supply side policies, the extent and type of suitable monetary policy and the effectiveness of macroprudential policy are the sources of policy uncertainty. Likewise, China has its own acute policy uncertainty problem as mentioned above. Reasons behind heightened policy uncertainty are policy paralyses and unconventional policies such as monetary quantitative easing policy and negative nominal policy rates following financial crises. Elevated policy uncertainty holds back investment and growth6 and causes heightened market volatility. Over the recent globalization period the world has become an increasingly interconnected place. Global trade has increased, broadened and deepened drastically because of trade liberalization, unprecedented capital flows and the international fragmentation of production in global value chains. EMEs have contributed to this development significantly as they have become increasingly more connected to the global production, monetary and financial systems. The unprecedented capital flows have also made global financial markets more interconnected than at any time in history. Advances in communication technology have further heightened and extended the interconnectedness of global financial markets. The increased interconnectedness together with sharply risen external liabilities has reinforced the proposition of the Impossible trinity (also known as the Trilemma) on monetary policy dependence as monetary conditions have become more correlated than before.

The Fed’s normalization of interest rate demonstrated that its impact on the global economy and financial markets indeed has been large, giving rise to significant capital outflows from EMEs, large adjustments and volatility in exchange rates as well as widened EM spreads and interest rates. The adverse effects of the Fed’s interest rate normalization has been on average larger than those occurred in previous two financial turmoil episodes namely the Eurozone sovereign debt crisis and the US tapering tantrum. Moreover, the disparity between the effected countries has been large too. The plummeted commodity prices as well as other factors led to this outcome as commodity importers suffered from both the lower commodity revenues and the tightening global financial conditions. Financial markets also differentiated EMEs by policy frameworks and prudent policies. Those having rich and better policy frameworks and prudent policies have withstood the recent global financial turmoil better than others. Commodity-exporting and commodity-importing EMEs have different monetary policy options. While commodity exporters have limited monetary policy space, commodity importers have some rooms to counteract. In the former group, inflations increased and balance sheets weakened due to the currency depreciation. In the latter group, in some countries, inflations decreased and central banks cut policy rates thanks to the low oil prices. However, in several oil importing countries, inflation is near or above the target bands. For central banks in these countries, tightening the monetary policy may be a priority for the credibility of central bank.